Quote:
Originally Posted by chemgear
I am not an expert, but how do you "sandbag" around this?
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At the end of the day finance is a confidence game – when debt levels reach a certain about (according to Ken Rogoff ~90% of GDP) people start to get worried. You build sandbags by calming people down and stopping them from pulling their money out of the game. You do this by getting some powerful politician coming out and making a promises that they won’t let “insert troubled entity here” go down, and in some circumstances they have to take action to keep that promise. This is what basically happened in 2008 after Lehman went bust, Paulson had his hands tied and had to bailout the rest of the banks before everyone pull their money and the entire system went to hell.
Greece only represents about ~7% of the entire Euro economy so them going down really isn’t that big of a deal. The problems starts when some guy in Italy sees Greece default, Greek banks go down as a result, and Greek people unable to get their money out of the bank. So what does he do? He goes to his Italian bank pulls out his money, so does his neighbor, and his cousin, and the next thing you know the Italian bank doesn’t have enough reserves to cover their deposits (no bank does) and it fails. The same thing happens in Spain and Ireland and spreads like a disease to France and Germany because they are all connected through the Euro.
That is worse case scenario and what everyone is really worried about when it comes to Greece.