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
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.
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