eli5 – How would Greece declaring bankruptcy in 2010 caused the German and French banks to go under?



I have been reading Adults in the Room, and something I don’t understand is how Greece declaring bankruptcy would have caused the Trillion Euro of periphery loans of the German and French national banks to suddenly go bad and result in the collapse of said banks/economies in the eurozone.

In: Economics

I thought it was cause the Germans keep bailing everyone out. Alot of Greeks don’t want to pay taxes or pay back the money that Germany has given them.

Declaring bankruptcy essentially means telling anyone who lent you money that you’re not capable of paying them back. Banks are the ones that lend money. So it is a chain reaction. Greece declaring bankruptcy means the banks that loaned them money are not going to receive payments that they expected which can cause the banks, in turn, to not be able to handle their borrowings. Like a chain reaction.

Banks make money by loaning money I have deposited at a higher interest rate than they are paying me. This means that at any given time they actually do not have all the money that is on deposit actually on hand. It is loaned out to other people.

If I have money in a bank that I know has loans out that are going to get restructured or even completely not paid back I’m probably going to want to pull my money out. Everybody that has money in the bank will probably want their money back.

Since banks are not required to have all the money that has been deposited on hand this will cause a problem. In that case they will be forced to call in their loans so they can pay their depositors. That will lead to companies choosing to go to other banks for their money needs. Essentially ending the bank’s ability to do business.

Before Greece went bankrupt, they borrowed a lot of money from the bigger EU economies.

When they declared bankruptcy, that was them stating that they just don’t have any way to pay back the money owed, – if you had loaned them money, then tough luck, you won’t be getting it back.

The problem is that when those sums of money are significant, the banks are relying on getting that money back to continue operating – if all of the people who have put their savings in a bank want to withdraw their money, but the bank loaned that money to Greece who then declared bankruptcy, the bank now don’t have enough money on hand to be able to give people back the money they had deposited.
This is the point the bank collapses – they can’t give people back the money they owe them, so the bank itself goes bankrupt, and all the people with savings now lose their investments. When you hear about government bailouts, this is when they step in – the government realise that if too many people lose their life savings, it has a huge knock on effect to the economy and the financial health of a country, so they step in to cover some of the losses.