Signs that your country is going bankrupt

As the confrontation between Greece’s newly elected government and the European Union intensifies, the country could run out of cash as early as March. Earlier, on January 25, 2015, Greece’s radical leftist party, Syriza, became the first anti-bailout party to win elections in the eurozone. Consequently, Prime Minister Alexis Tsipras is now refusing to accept any more bailout packages, instead demanding the restructuring of the outstanding debt. A request that is openly rejected by Germany, the European Central Bank and the European Parliament. Depending on the ongoing negotiations between the parties, Greece could be left to face bankruptcy on its own. This is an attempt to understand what leads to a country’s default and what happens afterward.

Case studies of past defaults in Argentina, Iceland and other parts of the world reveal some very interesting facts about the economy of a country that is on the brink of bankruptcy. Maybe it’s time for as many people as possible to educate themselves on these issues, to avoid them or, worse, deal with them. In the first place, the level of external debt shoots up above 100% of the country’s GDP; that is, a country owes the international community more than the total value of its products and services combined. Second, the level of the country’s short-term debt, that is, debt that matures within 12 months, is one and a half times or more the value of its foreign exchange reserves. In addition, the country’s exports are not enough to compensate this deficit.

In many cases, as the country approaches bankruptcy, the inflation rate rises, the unemployment rate skyrockets, and obviously the GDP falls substantially. Also, the local currency is in most cases overvalued relative to the US dollar and possibly has a history of pegging, eventually collapsing before the country defaults. Faced with all of the above, governments usually respond by raising taxes beyond the limits of the people as a last resort to get cash. As a result, the country is experiencing a painful mass exodus as the most educated, competent and wealthy flee to more developed countries, leaving behind a beleaguered majority.

As the situation spirals out of control, the government declares that it cannot pay its creditors and usually requests some type of restructuring. In the case of Argentina, the government initially offered to pay only 30% of its commitment to bondholders, but eventually paid just over 90%. However, in the Greek case above, the bondholders received only 50% of their capital. Whereas in the best of cases, the government would fulfill its commitments, but would ask for more time to do so. Meanwhile, financial institutions would be prohibited from transferring money abroad, banks could freeze all accounts for a set period of time and only allow minimum daily, weekly or monthly withdrawals and, in extreme cases, financial institutions would be closed for full to prevent capital outflow. Eventually, power companies would go out of business, gas stations would close, and food would disappear from stores.

As a result, the trapped majority would take to the streets and channel their anger at their bankrupt government and financial institutions. Clashes with the police break out and the country becomes more chaotic. In the case of Argentina, the situation escalated into an all-out civil war when the government declared a state of emergency and the country plunged into unprecedented turmoil. So unprecedented that barter trade replaced cash, property prices plummeted, people died in the streets, and the Argentine president was forced to flee the presidential palace by helicopter, eventually resigning and later being put on trial.

Now let’s go back to Greece. If there is a high probability that the country will experience any of the above or a combination thereof, let alone be abandoned from the EU, why would anyone risk their money investing a penny in Greece? Remember, “cheap” is called that for a reason, and nothing can stop it from becoming “cheaper” and “cheaper,” but this doesn’t mean it’s worth your money. Well, at least until there are tangible signs of recovery. Otherwise, Greece would collapse, in which case the ripple effect could quickly spread to Ireland, Spain and Portugal, to name a few.