Will Greece go bankrupt?

Published below article more than a year ago that is actually even more relevant today.

Martin Feldstein, Harvard professor of economics thinks it will. If it wasn’t for the Euro the current situation would have been easier for Greece to handle, he says.

Could Greece have the domino effect Lehman Brothers had?

Will it really go that far? Not overnight, but nobody would have believed that Lehman Brothers would go bankrupt. Or Russia defaulting a decade earlier for that matter.

Have always wondered how the Euro zone could have one central bank for numerous countries whose economies are so different. Seems to me like a recipe for disaster. As we know, the Euro was Chancellor Kohl’s baby and it is doubtful if it would ever have become reality without his dedicated work to celebrate the unification of Germany with a common currency. But something is very wrong when the economies of EU countries that stayed out of the common currency are doing better than the ones who joined.

Greece can neither grow out of trouble, because of fiscal retrenchment and its lack of export prowess, nor devalue, because it is in the euro zone. And yet its people seem unwilling to endure the cuts in wages and services needed to make the economy competitive. And we can’t blame them? A previous government had, with the help of Wall Street, falsified the national accounts. But nevertheless, Greece looks bust and unfortunately for the people someone has to pay.

If Greece still had the drachma they would have been able to do quite a few things such as devalue and increase exports as well as revenues. To make a long story short the drachma would have made it much easier, and less painful, for Greece to tighten up its policies and get its act together.

What can be done then? The escalating crisis—and the fact that Greece will almost certainly not be able to pay everybody on time—will renew calls to abandon it. That would spell trouble for Greece, European banks as well as other European countries. Almost makes me think of the domino effect Lehman Brothers had.

Do you agree with Professor Feldstein that Greece will ultimately have to go bankrupt? If so, how do you believe it will affect the Euro?

Photo: Flickr – alles-schlumpf

20 thoughts on “Will Greece go bankrupt?

  1. Greece? Bankruptcy? Euro? No, it's just another of those leaders communicating with us lesser folk from Planet Ego. Normal business should continue just the same 🙂

  2. What's not clear to me is what exactly would happen should a Eurozone country declare bankruptcy.

    In the past, countries that have done so have had their own currencies and the results are pretty well documented: sharp falls in the value of those currencies, rapidly rising interest rates, etc., all leading to a period of great hardship for the citizens.

    However, in the Eurozone this is more difficult. As part of the Eurozone, to what extent can it raise its interest rates to attract investors/capital? Certainly it cannot unilaterally devalue its currency… If Greece does declare bankruptcy, does it reach agreement with creditors to "take a haircut" and so downvalue its debts that way?

    Mind you, it's not just the Eurozone that has problems: the world's 4th (or is it 5th?) largest economy, California, is basically bankrupt, too. This presents the Dollar with similar problems to the Euro – albeit on a very much larger scale given the relative size of the Californian and Greek economies.

    (continued…)

  3. (…continued)

    Perhaps consideration needs to be given to Greece leaving the Eurozone; it could then declare bankruptcy and devalue its currency while increasing its interest rates to a level that would start to turn things around. After all, the country entered the Eurozone fraudulently (basically mis-stating its accounts to gain entry).

    We live in interesting times!

  4. Yes Guy that's the problem isn't it with one central bank – they can neither raise interest rates nor devalue. Greece's banks have already been down graded by rating agencies. If Greece goes bankrupt it could, according to experts lead to a "Lehman Brothers" syndrome amongst European banks.

    Good point about California and the dollar.

  5. Yes, that would probably be the best solution. If not, the Greek people will have to pay the prize for what their previous government did, with the help of a Wall Street firm.

  6. Your posts always have alot of really up to date info. Where do you come up with this? Just saying you are very creative Catarina. Thanks again

  7. I am from Greece and this moment, the best solution is either to declare bankruptcy or leave the eurozone.
    The biggest problem in Greece there is a lack of politicians who would have the willingness to change things and thy are not puppets.
    Greeks are not poor, the state is poor b/c of bad organization and a lot of corruption.
    My opinion is even I am from Greece, that the European Union should investigate the greek governments the last 30 years about the administration of the Delor's money etc.

    All the politicians are wealthy without have ever worked. It is amazing!

      1. It would be much better, b/c according to the Eurostat in Greece after we enter Eurozone there was an informal inflation at about 50% with the salaries remaining at the same level.

        Furthermore, just to mention that from the billion of euros that we have taken as aid from EU in order to develop the last 30 years, there is only around 18% of effective use. The rest has been used ineffectively in many ways.

        And finally, with the drachma we could be more competitive for exports. Now we rely on the EU and its financial help. and what it is not clear is why they lend us money when it is clear that there is no chance to take them back??? why they enlarge our debt as a state? unless, they are going to reconstruct our debt, that is the only solution.

  8. I don’t think Greece will go bancrupt. I really liked your blog, it is in my bookmarks. Thank you for good job !

  9. I'm Greek and I believe that Greece declare bankruptcy. As you say, If Greece goes bankrupt and exits the Eurozone, we would be able to devalue our currency and increase our exports. At this point, this seems like science fiction because of the huge fiscal deficit that is 4x higher than the 3% that the EU allows for its member States. By being in the Eurozone, Greece is trapped and has to implement the painful austerity measures to become competitive. The problem is that no matter how tight the policies are the debt is so huge that it seems almost impossible to achieve what no other country has achieved so far: having a deficit greater than 10% of its GDP and overcoming recession without devaluing its currency. Take Argentina as an example. It is sad, but, on the other hand, the credibility of the country abroad is doomed, not only because Greece has asked for the help of the EU and the IMF, but mostly because it has been spending money it didn’t have and lied about it for many years. For the Greek citizens, drachma will be better even if in the beginning it will be chaos. Chaos is now as well.

  10. hi there! i am greek living in greece…will we go bankrupt?mmm let me express my thought in a couple of lines.at this period of time almost everyone i know in greece is bankrupted(and bank robbed).i really don't understand how our goverment says that we won't go bankrupt as a country and at the same time almost all of the citizens except the wealthy ones who send their money on switzerland are already broke. i think that it is better to go bankrupt as a country and suffer for a few years than beiing struggled by the IMF and the EU.i'm only 29 years old but i remember the times when greece was producing everything,agriculture was a big export,milk,fish,groceries and some big industries also,but year after year the EU sets standarts on the exports to increase imports that has as a result the totally collapse of the economy,we don't produce anymore!!!!!
    as a greek thinker said to mister STRAUSS KAHN……..OUR DEBT YOUR PROBLEM.we are a small country of about 12 million people and we might go bankrupt….but what will happen if SPAIN or ITALY will go bankrupt? who is going to buy the expensive german products?what will be the future if germany it's self? this is going to be a chain reaction that no one will stop,unless of course a third world war..unfortunately things are not very stable,the last 40 years USA and EUROPE were the 2 players of capitalism now CHINA is on the game so a game of capitalism can only have 2 big players so EUROPE is going out of the game..why USA isn't on IMF? just a thought.
    p.s you have a great website keep going.

  11. Yes Vasilis a true picture but lacking a few important facts…. Ordinary people like me, a self-employed tax paying citizen. I never have cheated and pay all my debts my business has been running for 20 years along with my private pensions investments and other insurance policies. I have never had any grants and don't owe money except on my small mortgage!!! I now face lossing everything. The insurance and pension policys lost …ASPIS……………….. my investments ……..lost holdings taken and no chance of getting those back………………… no one can afford to buy anything including insuring theirs cars hence no repair work and other repair shops are now trying to do my work too(once they were my clients) I know only just cover bills and that may not last!!!!!!!!!!!!!!!!!!!!!!!!!!! It is sooooo depressing where do we go from here? oNLY THE RICH WILL BENEFIT us well who gives a s…………………….t.

  12. As a new business owner in Greece ( I know, BAAAD timing!) I have a question which everyone is asking…. if/when Greece defaults, what happens to private bank accounts, Bonds etc? half of the people are saying that nothing will happen, obviously apart from changing currency and all involved in that but others are saying that any money will just basically disappear…. scary!

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