Bankruptcy is not the end of the world

?? The news headlines on Greece grow more ominous with each successive article.??? With such titles as "Greece looks into the abyss!";?"Greece burns!"; "Greece expelled from the Union!",?it really sounds as if the end is nigh.?There are articles describing in detail the hypothetical scenes on the streets a day/a week/a month after Greece declares bankruptcy.?? It all sounds indescribably tragic.?? An either/or approach is being touted:?Greece gets bailed out some more = peace or:?Greece declares bankruptcy = the end of the world.?? This kind of black and white thinking is often used to exert pressure on decision makers - in this case on those who would rather not fork out the money for the next aid tranche.?? Most recently even German finance minister Wolfgang Scheuble talked about the need to formally announce insolvency.?? Like many other financial experts he is also aware that even if Greece's debt is reduced to 120% of GDP, it will not be able to repay it.?? Today even this figure has been called into question.?Give the speed of the reforms and the scale of the expected recession in that country for the next few years and on the basis of the European Commission's latest data, after the debt reduction which is now being negotiated with private creditors, Greek public debt will shrink to 129% and not 120%.?? There is no doubt then that this reduction will not be the end of the story.?The question is, will a formal declaration of bankruptcy help Greece in the long process of getting back on track.?Greece has been insolvent for a long time because it cannot honour its current commitments but has not yet formally declared bankruptcy because the European Union and the IMF are helping it to service previously contracted debt by lending cash.?If it were just a question of quickly recovering strength and getting back on the path of growth, this could be done without first declaring insolvency.?But Greece is not Italy where the for a certain period markets lost confidence that the country could honour its current debt service commitments.?? This has been the case in Greece for the last two years and there is no end in sight.?? Moreover, the size of the Greek debt will not get any smaller even based on the most optimistic assumptions which means basically that there is nothing at all to point to the debt ever being paid back.?? This is the reason that private investors have agreed to negotiate debt relief which in practice is an admission that the country is insolvent.?? Not actually saying so is just sophistry.?? From the standpoint of economics, Greece is bankrupt.A formal declaration will have legal consequences and cause an avalanche of events, from insurance claims to Greek companies being unable to get financing.?? But the country will not be grind to a halt.?It will continue to receive help from the EU and the IMF to meet current expenditure needs.?? Such assistance will be reduced as formal insolvency brings on the next round of negotiations on the remaining debt reduction.?As I have repeatedly indicated, Greece must reduce all its debt by 70% in order to achieve a level which it could actively service for the foreseeable future.?But even after the debt is slashed, Greece will still be on a drip feed and I don't think for a moment that this lifeline will be cut off because it is in no one's interest to have a run on the banks or mass demonstrations due to the State not paying its bills on time.?Only in the Soviet Union would the state have got away with not paying salaries for several months.?? So cash will continue to circulate although it would be better if the debt cut could be performed once and for all so that the risk of further reductions did not loom in the background.?Some people think that only by leaving the euro zone can Greece solve its very low competitiveness which is its main problem but if this happened, the EU or perhaps only the IMF would still have to bankroll the country for the reasons I mentioned earlier.?? It is possible that such aid would have to be greater because of the scale of devastation which would be caused by the devaluation of the drachma vis a vis the euro which would lead to a much deeper recession than the present one.?Neither would Greece have much to gain with a new currency because as a country with barely any exports, it would not have any competitive advantage to benefit from.?However a formal declaration of bankruptcy is a different animal altogether for it is an official confirmation of the status quo, forcing creditors to accept a much deeper but more realistic reduction.?If subsequent decisions take full account of the facts and common sense,?rather than heeding illusions and unrealistic schemes, the greater the chance of recovery.

Tags:Cheap Louis Vuitton,Louis Vuitton Bags,Louis Vuitton Handbags