For months now, the European Union and the IMF have been grappling with Greece’s unmanageable debt and economic bankruptcy — to no avail. That failure has already precipitated panic runs on banks in Greece and Spain. It is looking more and more likely Greece will default and may even exit the Eurozone entirely.
But what does that mean?
We know what happens when individuals in the U.S. declare bankruptcy: debts are wiped clean, but at the cost of the individual’s inability to secure future loans and credit. Is that also what happens to entire countries that default?
Simply put, “default” means that a country tells its creditors it won’t be making any more payments on its debts.
Financial Times has an interactive graphic that attempts to answer that question by describing the likely consequences of a country defaulting. Here’s the flow-chart (click chart to enlarge):
You can also see a break-down of the flow-chart and listen to an accompanying audio by going on the FT website. Click here!
For readers who prefer an outline text approach instead of a flow-chart, here are the consequences of Greece defaulting on its debt:
1. New lending to govt stops → govt cannot pay its bills → economy stalls; govt employees lose their jobs; streets explode in protests and riots → eventually new loans are secured.
2. At the same time, the value of Greece’s govt bonds plummets → Greece’s banking system faces collapse → eventually new loans are secured to shore up the banks.
3. The fear and possibility is that Greece’s default will be contagious, resulting in the fall in value of the govt bonds of other Eurozone countries, as well as a collapse of non-Greek banks.
I’m now thoroughly confused. From the flow-chart, it appears that whether a country defaults or not, the eventual result is the same:
But that’s exactly what the Eurozone (in reality, Germany) has been doing with Greece — extending new loans to shore up that country — which has only succeeded in “kicking the can” further down the road.
Can someone explain this better than I (or the FT flow-chart) can?