Well, this was gonna happen. During recession most government across the world followed Keynesian economics of boosting growth by spending more. To finance such spending, governments borrowed heavily from the market. And when the government cannot repay back, it becomes a problem. That’s what has happened to Greece.
To summarize in financial terms, the Greece debt problem is one of solvency and not of liquidity. Picking up dictionary meanings for these-
- Solvency comes from Solvent which means a liquid substance capable of dissolving other substances, in a way, which in finance would be like something that can help or dissolve obligations.
- Liquidity comes from Liquid which means something fluid that has a property of flowing easily, which in finance would be something that can easily be liquid like.
Elaborating more and relating to Greece situation this would mean that the Government’s balance sheet had more of liabilities than assets and it was in a situation where the interest to be paid on loans was higher than receivables for the government. That made it insolvent. Government could have still converted most of its liquid assets into cash (which is liquidity) but that would not have solved the problem either.
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