euro, bankruptcyI was going through articles about the euro zone crisis and was surprised at the bailout packages and the purpose of them.
Lets assume Greece is a person and he runs out of money. If we look at his lifestyle, he has been spending lavishly without thinking about the future and he has very less income compared to his expenditures (because of tax evasions). This person seems to be irresponsible and should not be trusted with debts in the future and hence people should not be giving loans to him. But I see the opposite in case of euro zone crisis, where Greece is being granted billions of euros as bailout packages. What is the incentive behind trusting Greece again and lending so much money, apart from humanity?
Also, the European Financial Stability Facility has made banks agree to a 50% cut on their greek holdings. Why would banks agree to lose something and how would the people invested in those banks react to this step?
There are many reasons but you could almost summarise them by drawing parallels with the Cold War-era game of Mutually Assured Destruction.
Here's a fantastic chart from the BBC showing the web of loans across the Eurozone. Germany (and, prior to its ratings downgrade, France) secured the bulk of European Currency Board debt through the strength of their AAA ratings. This permitted weaker European economies to borrow at lower rates than they would otherwise be able to afford. It also fueled a debt boom in which Greece, amongst others, borrowed a large amount.
The problem for Europe in just sacrificing Greece is what events have already shown: investors start to question the strength of the entire Eurozone and the security of all their loans in Euros if the EU is not prepared to stand surety for one small member.
Germany believes, as you have stated, that bad lenders should be cut loose. However, Germany and France between them stand to lose a trillions of Euros in loans to their local banks if they simply let the weaker Euro members economies collapse. Instead of writing off say, 50c in the Euro, they may have to write off the lot.
Far better to create a bailout package that permits these economies to restructure and get back on track than let them collapse and plunge not just their, but every, economy into fiscal crisis.
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