Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: Snowshoe who wrote (72934)	3/18/2010 1:43:13 PM
From: KyrosL	Read Replies (1) of 74559

There are a lot of complications for a European country going bankrupt because of cross border trade and investments. These complications are what makes Greek bankruptcy a 50% proposition rather than a 90%. Theoretically, a Greek bankruptcy and exit from the Euro should be a 90% proposition. This is because Greece's main industries, tourism and shipping, will fundamentally be untouched by bankruptcy, so a bankruptcy is theoretically attractive. I am assuming that a possible bankruptcy will take the form of re-introduction of the old Greek currency, drachma, at an initial equivalency of 1 drachma to 1 Euro, and declaring that all holdings of Greek government bonds will be paid in drachmas at the 1 to 1 equivalency. Simultaneously, all domestic Euro deposits will be converted to drachma as will all salaries and prices. The result will be an almost immediate devaluation of drachma of 50%, which may eventually settle to around a 30-40% devaluation, which is the current estimate of the degree of uncompetitiveness of domestic Greek wages.

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