I have a REALLY basic, probaby stupid question

[Remember Me]

I really have no knowledge about economics, how the economy works in reality, finance, world economies and finance, etc., but they interest me when conditions are like they currently are.

So, Greece and basically most if not all the world is in debt.

What will happen if Greece defaults?

What would happen if Greece's debts were just forgiven?

What would happen if ALL countries' debts were forgiven? I understand that some institutions, countries and people would "lose" money -- but no country's basic income is based on repayment of others' debts, are they?

[Indydem]

1. Why would anyone ever agree to that?

If you make a loan, you expect to be repaid. Whether it's a bank, a private individual, or a government, there is an expectation of repayment.

Not "some institutions" - ALL institutions would be insolvent. YOU would lose everything, since banks don't loan sky money, they loan the deposits of others.

It is not possible unless you want to revert to the stone age.

[CJCRANE]

6. The trick is:

don't lend money to people who can't afford to pay you back.

If you do, then you should take the hit.

[dtexdem]

8. Don't leave the world economic system in the hands of those who will screw it up ...

making it impossible for those who would otherwise have paid back loans to do so in the screwed-up economy.

[Indydem]

9. How do you define "can't afford."?

The Greeks can afford to pay their debts if they raise taxes, cut some spending and quit retiring at 53.

[CJCRANE]

11. German taxpayers will still have to bail them out.

The debts are just too big. Then there's Spain, Italy, Portugal waiting in the wings.

IMO the bankers have created these huge financial black holes as a way of sucking up taxpayers' money and sovereign surpluses.

I've been on DU for nearly 10 years and many DUers predicted this ongoing financial crisis years before it happened (as a result I started rapidly paying down my debts in '06).

[jwirr]

13. Some countries have been forgiven in the past. So it is not totally

far fetched. Likely to happen - I don't think so. Greed is still the top dog.

[Indydem]

15. How is expecting to get your money back GREED?

Exorbitant interest? Sure. Financial games? Absolutely.

Expecting that money loaned in good faith at a reasonable interest rate will be returned to you? Absolutely NOT.

If you deposit your money in a bank, and the bank doesn't return it to you,I bet you'll be pretty pissed off. Yet when the bank loans that money to XYZ, you think the bank should just forgive it, and still have your money to give back? Where do you think that money is coming from?

[CJCRANE]

16. But they want the Germans to pay for it.

That's the problem with the bailouts since the beginning. The banks want someone else to pay for their mistakes.

We all know the banks and credit agencies committed fraud. They gave the wrong ratings and loaned money on a huge scale to people and institutions who could never pay it back. That is not lending money in good faith. It's a scheme to get enormous profits from the taxpayer.

[Indydem]

20. That is not what is happening at all.

The Banks of Europe, both private and Central, loaned Greece money.

Greece cannot pay it's bills.

If Greece defaults, the banks (both private and central) will suffer enormous losses. The destruction of private banks will mean the depositors who gave the banks the money to loan will lose all their money and the economy of Europe will crash in a hurry.

Therefore, the EU has agreed to bailout GREECE (not the banks) to keep the economies and banks from collapsing. Greece must get their shit in line to receive the bailout. Greece refuses.

Germany being the strongest economy will shoulder the largest burden.

The problem originated with Greece and their cooking of their books to make themselves look like a sound investment when they were, in fact, not. Goldman Sachs allegedly helped with this UPON THE REQUEST OF GREECE. Goldman Sachs isn't getting any of this bailout because American banks are not exposed to the debt like European banks are.

The banks didn't make risky loans. They didn't try to make a giant profit. They aren't even asking for this bailout.

Are you really trying to insinuate that the financial institutions across the globe created this mess to lose a huge amount of money and then get a taxpayer bailout for a portion of it? That's just ignorant. All the companies you got bailouts lost billions in that deal, and many of them went out of business.

[PassingFair]

26. The banks didn't just "loan" money to Greece. They SOLD Greece, and other nations,

...shit sandwiches disguised as "investment" tranches and
now they want working-class Greeks to EAT THEM.

The banksters are FRAUDS.

Get the picture?

[Indydem]

27. Wrong.

Greek was not investing in anything. They have run a deficit and needed loans from the EU for years. The economic collapse exacerbated the situation.

Governments were not "in" on the mortgage mess and if you think the government is BUYING bonds, you need to do some serious research.

[PassingFair]

29. Right, no connection at all.

"Greece made a huge deal with Goldman Sachs in 2002 for cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period, to be exchanged back into the original currencies at a later date. These transactions are not contrary to the current E.U. rules per se, as they are actually part of normal government refinancing. However, in the Greek case the bankers created a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of ten billion dollars or yen. In that way Goldman Sachs managed to arrange an additional credit of up to one billion dollars for the Greek government. This credit, disguised as a swap, did not appear in the Greek debt statistics.<17>

Ben S. Bernanke, Federal Reserve Chairman, said the U.S. Central Bank is reviewing derivatives contracts arranged between Goldman Sachs Group, Inc. and investment banks with Greece.<18> It remains to be seen if, in the near future, E.U. officials will amend their legislation to crack down on swap transactions that might be used to mask real financial situations."

[truedelphi]

32. Ah, have you not read anything about why we are in the mess we are in?

And by "We" I mean most of the nations of the world...

The mess has nothing to do with the houses that were sold to poor people who could not afford them. There are simply not enough poor people in twenty thousand universes to create the quadrillion dollars worth of indebtedness.

It has everything to do with the exotic investments that were basically the gambles the financial firms created - and yes, those were based on the premise that the subprime mortgages would eventually go unpaid. But if they hadn't bet on those mortgages, they could have made up similar exotic investments, er, bets, on the price of oil, or the cost of tulips, or anmy number of things.

And to this day, the banks and financial firms are still arguing that they cannot survive if they have to have regulations! Although anyone who has read a History of America, 1915 to 2001, knows that the bankers and Fiancial Hot Shots in this country and elsewhere, always made at least at tidy eight percent while being regulated by Glass Steagall. And it has only been since the repeal of GS that we have these continuous economic "crises."

[femrap]

34. That's exactly correct.

TARP was a huge heist. Taking taxpayers money and giving it to Banksters....like Goldman Sachs needs more money. They even changed their corporate structure so to get the taxpayer's money.

The whole game is get the Taxpayers on the hook for the losses. Many books have been written about this.

And now, without Glass-Steagall, we're in big shit. BofA and Merrill Lynch are ONE corporation....it's total CORRUPTION. BofA transferred derivatives from Merrill to the other side so to be under FDIC.

It's lunacy.

The world would be better off without Goldboyz Suck.

Bonds are an investment just like any other....there is RISK involved. There is no guarantee that one will get her money back, nor interest payments.

The game is over...the paradigm must shift from competition (which we have little of these days) to cooperation. A business co-op is a fine business model. Greed has reached its limits. OWS!!! No on Issue 2!!! The people have had enough.

[jwirr]

17. When it comes through the IMF and World Bank by way of Milton

Friedman's disaster capital machinations.

[truedelphi]

31. Especially since we have been offered, via Naomi Klein, some truly

Vivid portrayals of what happens to nations that have the Friedman "Shock Doctrine" "Free Market" theories shoved down their economic pipelines.

There are the examples of Chile and Argentina, which ended up with military junta's jackboot on the throats of their citizens, with many citizens ending up "disappeared.'

Or else, you end up in a situation like the Mafia-ruled Russia of today, where the top chiefs are worth billions while the elderly are starving, while the middle aged are bankrupt, and while teenagers become prostitutes for the Top Hot Shots in Suadi Araboia.

[truedelphi]

30. Look, scamsters cloaked with the "good name" of major financial institutions

Sold the people of the world a bunch of ludicrous "investments" such that some people think a quadrillion bucks worth of "investments" could be called in, how the hell can that be paid?

There isn't enough material stuff in the world to make such repayments.

The Icelanders had it right - sure, they shouldn't have been greedy enough to buy into such a scam - but since the scamsters came to them with the hard sell, why should they endanger their lives forever, and the lives of their kids, and the grand kids and the great grand kids.

The people at the top that invented all the various exotic investments need to be given a reality check.

And the people of the nations of the world need to continue their protests, and let those "Too Big To Fail" simply fail.

[Remember Me]

23. Who would want to do that?

Why anyone hopelessly in debt, of course.

Somehow I get the feeling "stone age" is a bit of an overreach. And your tone impairs your credibility with me otherwise. But thanks for the pontification. Well noted, I assure you.

[Indydem]

28. My tone?

You mean my belief that we need serious reform, not to burn down all of the banking and investment institutions?

Yeah, I guess that might make me suspect to someone who believes otherwise. Is that you?

[librechik]

2. this is where we find out that banks and corporate financial entities are MUCH stronger than govt

It's the profit-centered banks which have to forgive the debt. And that is not in their interest, at all. At least, the way they think. Apparently it's just fine with them if real humans disappear and only corporate persons remeain in a poisoned landscape. But because they aren't real people, thay have no compassion, only the relentless drive to profit.

[nichomachus]

3. You have to understand that none of this is an accident

The Powers That Be have a plan that they have over the years test-driven in other countries. Now, they've unleashed it on the world.

1. Drive the country into debt.
2. Demand "austerity measures" as a punishment.
3. Destroy unions
4. Depress wages
5. Privatize the common infrastructure
6. Eliminate taxes on the wealthy
7. Eliminate government regulation
8. Eliminate all social programs

This is their goal. What you're seeing isn't something unexpected. It's what the PTB set out to do.

And the last chapter in their playbook is "Deal with the civil unrest that will follow."

[Remember Me]

19. Yeah, I know: Shock Doctrine

But that wasn't my question, was it?

[nichomachus]

24. Well, to answer your question

Your patronizing tone aside, nothing would happen, except that the PTB would use it as an excuse to enforce all their goals -- to the max. The money just goes from one pocket of the ultra-wealthy into another. The ultra-wealthy will come out just fine. The working class will suffer more and more.

And actually this scenario predates Shock Doctrine. Greg Palast predicted it long before Shock Doctrine came on the scene.

[OHdem10]

4. The first thing to remember we have a GLOBALIZED System.

In a sense all Western Countries including USA
are JOINED AT THE HIP. A lot of Americans do
no understand this accoring to a Business
Program I saw the other night.

The Euro-Zone are interdependent. Right now
Germany is financially in the best position
to help others(Greece). Germany is between
a rock and a hard place. German Citizens are
loudly protesting their tax payer money be used
to bail out Greece. The German Leaders for the
most part believe they must help so they are
demanding Austerity be put in place in Greece.
Greek Citizen are defiantly opposing the severe
cuts which are required by Austerity. It gets
touchy because many European Countries hold Greek
Debt. What happens to France (holding Greek Debt)
if Greece just defaults and pulls out of European
Union? Does this cause a Domino effect with other
countries, Italy Spain and Portugal becgin to falter
and get to possiblity of defaulting? Now with all
this USA BANKS have ties to many Banks in these countries.
More losses for USA.

My understanding is shallow but I think we can see
how we are all on the precipice of another recession.

I have heard people say Greece would be better off
to default. Maybe good for Greece but what about
other countries with ties to the banking syatem there??

[jwirr]

14. How would it effect this situation if EU were to end their joint economies

and go back to national economies? And break up the big banks into smaller ones?

[frazzled]

5. As I understand it, because the European Central Bank holds most of the bonds ...

So default by Greece would essentially bankrupt the ECB, and the Euro would essentially be totally destroyed.

... given this simplicity, why do we have such confusion about how to actually do it?

Berlin, backed by the Dutch, Austrians, and Finns, have been arguing for weeks that there can be no new bailout of Greece without the country’s private creditors being forced to suffer losses on their loans. Otherwise, they argue, European taxpayers will be shouldering the costs while the international banks pocket the proceeds.

Leave aside the politically charged “international banks” bit for a moment and this makes perfect sense. Yes, if you do lend money to someone then you do face the risk that they won’t pay you back. This is one of the calculations you should make before deciding to lend them money and it should certainly inform the interest rate at which you are willing to lend that money.

You get that calculation wrong, well, tough. You lose money. But why doesn’t the European Central Bank agree?

The ECB, the European Commission and other EU countries led by France argue that this could pave the way to disaster, with the financial markets decreeing the compulsory “haircuts” on private bondholders a Greek default, a “credit event” that could lay waste to the single currency.

Ah, no, that’s not quite being open about the facts. The reason the ECB doesn’t want there to be a haircut on the bonds is that the ECB owns most of the bonds. So a haircut would likely bankrupt the ECB and that’s what would lay waste to the single currency. Imagine, a central bank going bankrupt: not going to do much for the currency it’s supposed to be a guardian of, is it?

For what has been happening is that the ECB has been buying bonds in the open markets as a way of reducing the interest rate that Greece must pay on market borrowings. Plus, and here’s where it gets more dangerous, it has been taking Greek bonds as collateral against loans to: well, against loans to people like the Greek banks. Which, if there is a haircut on the bonds, will all go bust immediately. Leaving the ECB with that collateral which is now worth so much less than the loan against it that it will (near, maybe,) wipe out the ECB’s capital.

http://www.forbes.com/sites/timworstall/2011/06/16/explaining-the-greek-debt-crisis/

[Remember Me]

22. Thank you. This comes closest to providing an answer to my questions

And I greatly appreciate it.

[rurallib]

7. Certainly not a stupid question

I am guessing there are governments, financial ministers and bankers all over the world asking that very question in some form or another.

Of the $13T Us debt, I believe @ $8T is owed to the people of the US. I certainly don't ever expect to see a check from the gummint for my share. I doubt anyone else does.

[Indydem]

10. That 8T is in the form of bonds.

Do you own bonds? Then you will get paid.

You don't get paid just because you are a citizen and think you should.

[bossy22]

12. The U.S. Government has never missed a debt payment

and as long as it chooses, it never will.

Thats where these repubs are fear mongerers- talking about how we are going to turn out like greece. THE U.S. CAN NEVER DEFAULT ON ITS DEBT DUE TO OUTSIDE FORCES- we denominate our debt in our own currency which we control- therefore we can always "ease" our way out of a debt crisis (though this is not a good scenario- its not a default)

[tortoise1956]

25. Are you talking about printing more money?

I'm not sure I understand what you mean by easing our way out. I do know that if we arbitrarily print money, then we face the threat of going into an inflationary spiral that would make today's financial outlook look positively rosy.

If it is something else, please explain it to me.

[biermeister]

18. read the book Confessions of an Economic Hitman by John Perkins

you'll get a better understanding of the process we're seeing abroad and at home



in the meantime watch this
http://www.youtube.com/watch?v=n7Fzm1hEiDQ

enjoy!

[Remember Me]

21. I'm passingly familiar with Stiglitz, and the dirty tricks of the IMF and World Bank

and note that I wasn't asking about how we got here or why. But thanks. I loved the little video.

[asymptote]

33. basic summary

If Greece defaults, all the European banks holding Greek bonds as assets will eat substantial losses on their now-worthless status. But that's not even the start of it. Greek debt is a relatively small percentage of that which is being held by European banks; the real problem is that if Greece defaults, bondholders would start to think "Oh, crap, Italy, Spain, and Portugal might default too!" and, in an archetypal self-fulfilling prophecy, would start selling off those countries' sovereign bonds en masse, which would cause interest rates on the bonds to go up, which would make them more difficult to repay, which would result in Italy, Spain, and Portugal defaulting. After this, without any recapitalization (see below), the European banking system's collective balance sheet would be deeper in the red than a seaport in a cranberry tsunami, and it's hello, Global Recession 2.0.

This is why authorities in Europe have been scrambling for the banks to "recapitalize" , i.e. to stock up their balance sheets with equity by selling ownership shares (often directly to the state), so that they can better absorb any losses from default (or from significant writedowns) if Greece indeed does take that route.

What would be the consequences within Greece of a default? They'd undoubtedly have to go off the Euro and back on the drachma, which would probably mean a major haircut for domestic savers. However, this may actually be the least worst of options for Greece. There is no way they can pay down their current debts and still function as a democracy: every round of austerity that gets implemented has a contractionary effect on the economy, which increases the debt-to-GDP ratio and actually drives the country deeper into debt in practical terms. The only way this debt could be paid off is by such drastic measures as could only be implemented under a military dictatorship, an institution which Greece has a bit of a history with. If they defaulted and returned to the drachma, getting credit on international markets would be like trying to get blood from a stone for a while, but the abandonment of the Euro would give them the extremely valuable recourse of currency devaluation: devalue the crap out of the drachma, thereby making Greek exports cheaper; start running a trade surplus, and credit markets automatically become a lot more congenial. (I can go into more detail on this last point if you want.) Within a few years things could be relatively back to normal; essentially the same thing happened with Argentina earlier in the century.

Hope this was helpful.