The Greece Banking Crisis & How It May Wipe Out Your Savings
If Greek banks can’t open, it could very well mean the end to your savings as you know it today. Bankers and government officials are furiously negotiating to prevent Greece from defaulting on its financial obligations, but it’s not a pretty situation.
Creditors readily admit that Greece can’t pay back their debts, and citizens across the country are emptying their bank accounts.
It’s a very serious situation that could mean the collapse of other countries financial systems as well.
The Problem With Restructuring
Debt restructuring is a viable option that would allow the Greek government to continue operating, but it’s a very unlikely scenario.
Given the history of Greece’s financial problems, creditors are unwilling to assist in a restructuring because they fear it would only cause Greece to make the same mistakes again.
They believe it would create an increase in spending, and wipe out any of the much needed leverage to force the reforms that are needed. The economic situation in Greece is dire, and any concession by the lending authorities is believed to create an atmosphere of fiscal irresponsibility.
Downsize Future Liabilities
Since many believe that Greece can’t address it’s economic problems, the solution from creditors seems to be to reduce the total future liabilities. This way, when the inevitable shoe drops, creditors can better shield themselves from the aftermath. Creditors are asking for additional surpluses, and they want Athens to cut spending on items like pensions and other easily downsized options. If Greek agrees to these conditions, the creditors are willing to extend additional credit to help with a financial restructuring.
The Situation in Greece
As of June 30, 2015, the ATMs in Greece were emptied by customers. While this isn’t the only pressing issue, customers not being able to access their money spells big trouble for everyone. If the Greek banks default, that money can’t be adequately guaranteed by the government. Since creditors are unwilling to offer additional credit, citizens of Greece are going to find themselves in a continually devolving economy. This financial meltdown will have a worldwide impact on every country’s ability to buy and sell.
As Greece Crumbles, So Does the Internet
If Greece can’t pull itself out of it’s default, the entire digital infrastructure that the world relies upon and effects how money moves will be affected.
When digital reserves are greater than money in the banks, cash becomes king again.
Since there is not enough cash in the entire world to cover all of the world’s debts, this could be bad news for your virtual savings and your ability to access your funds.
Greece could create a situation where having money in your bank account is not the same thing as having cash in hand.
It could literally create a situation where your bank owes you money, but there is no way for you to access that money.
This is what the people of Greece are discovering, and it could create a domino affect that spreads to other countries.
What’s Happening in Greece?
The short version is that Greece is overdrawn.
This means that the bank’s customers can’t get the money they are owed.
The country owes more than it can pay, and likely more than it has available assets.
It defaulted on its payment to the International Money Fund (IMF), and it will vote for a temporary stay of collapse. The country voted “No” and now has to deal with the aftermath of a no vote.
Many economists state that a no vote would require the abandonment of the euro and face the grim uncertainty about the future.
As the economy has returned to cash trading, the existing merchants that took plastic must now hope the banks honor their transactions.
If bank’s fail to honor the transactions, then businesses will also face hardship, which may be enough to put many small businesses under.
In the week leading up to the vote, citizen’s managed to wipe out nearly one-third of the country’s ATM network.
Banks limited withdrawals to a mere 60 euros per day starting when the ATMs opened on Tuesday, June 30th, 2015.
What the No Vote Means
The finance minister, Yanis Varoufakis, resigned to help ease the burgeoning tensions before the negotiations between Prime Minister Alexis Tsipras and the European leaders begin.
Greeks felt the 61 percent of “No” to the referendum on the European Commission’s demand for a more strict regulation of pensions and taxation was a promising move.
German and French finance ministers were meeting to discuss options to help keep Greek banks float long enough to make a deal.
The European Commission is also looking at providing humanitarian assistance if necessary. Greeks now have to look at the reality of a temporary cashless system that is based on an electronic system for bartering.
Essentially, banks are looking to float customer money until an injection of money can be made into the system.
For consumers that have ever tried to float a check before there was money in the bank, this is essentially a legal form of check kiting.
However, if a consumer did this, they would find themselves with fines, a closed bank account, or even criminal proceedings.
Getting Real About the Deficit
Greece doesn’t have as much physical currency as it does money available.
While this is clear, it’s a normal part of how modern economies work.
They exist based on the premise that customers are not going to pull all of their money out on a mass-scale.
If customers ever did pull their money out of their accounts in favor of cash, the entire financial system would collapse.
Take the U.S. economy. The U.S. economy totals close to 36 billion pieces of physical cash that accounts for about $1.3 trillion dollars.
The total value of U.S. money stocks is at $11.9 trillion, and nearly two-thirds of that is held in foreign countries, banks and investments.
This means that $10 trillion dollars of U.S. money doesn’t actually exist.
The Federal Reserve and the Deficit
It’s not typically a cause for concern that we don’t have enough physical cash to cover the total amount of digital currency.
The Federal Reserve constantly monitors and keeps careful accounting of inventory levels.
They weigh the balance of currency paid to banks, and take that against how much money is needed to keep the economy in good condition.
If new money is needed, the Treasury Department is told to create money by printing it. Of course, this makes the money worth less.
The more money available in circulation, the less valuable it is. It’s basic supply and demand. If you have one orange and three people want it, you can charge more for it than if you had two oranges for three people.
As the economy improves, money can be taken out of circulation to pay off the debt and improve the overall economy.
Where Greece Failed and Why it Matters
Greece has to rely upon the European Central Bank, which works along with the European Union’s national central banks.
Since they can’t just print more money when it’s needed, and there is an approval process required, the Greek banks have run into trouble.
This creates a very real emergency that creates a drastic and dramatic effect on the world economy. The euro becomes destabilized and the entire world must essentially brace for a potential economic train wreck.
While unlikely, if a deal can’t be met, it’s very possible that your savings could be wiped out as there are not enough physical cash reserves to cover the total amount of money in digital circulation.
What makes matters worse, is that since Greece has always been a primarily cash society, they can’t simply pull out the Square Reader to start accepting payments.
Cash must be infused into the economy, and the country’s current setup is ill-equipped to quickly facilitate that option.
What can you do about the Greece Banking Crisis?
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