Greece’s Debt Crisis Explained
Greece, the weak link in the euro-zone, is inching closer to defaulting
on its debt. The country has been in a long standoff with its European
creditors on the terms of a multibillion-dollar bailout. If the country goes
bankrupt or decides to leave the 19-nation eurozone, the situation could create
instability in the region and reverberate around the globe.
1. Did Greece default on its debt?
The International Monetary Fund did not use the term default
after Greece missed its payment deadline. The fund instead placed the country
in so-called arrears.
Credit-rating agencies will not consider Greece to be in default
based on missing the I.M.F. payment, for the technical reason that the I.M.F.
is not considered a commercial borrower. But the ratings agency Standard &
Poor’s did say Tuesday that it would designate Greece as being in default if
the country cannot make payments to private creditors, like €2 billion in Greek
Treasury bills that are due on July 10.
Regardless of the country’s technical status, missing the
payment will most likely prove to be a warning that Greece will probably be
unable to meet its other obligations in coming weeks to its bond holders and to
the European Central Bank. That might make the central bank less willing to
continue emergency loans that have been propping up the Greek banking system
for the past several weeks.
Greece’s G.D.P. and
Unemployment Rates in Europe
First quarter 2015 average.
Source: Eurostat
2.
What happens next?
That’s the billion-euro question.
Sunday’s referendum will test whether Greek citizens want to
stay in the eurozone. New elections could also be held if Greece’s financial
situation worsens. Or Greece could test the willingness of Russia or China to
help should talks with Europe falter.
Some people are now saying that the real deadline is late July,
after all the warnings that Tuesday was the make-or-break day. July
is when Greece owes the European Central Bank a 3.5 billion euro payment. If
there is no international bailout program in place by that time, and little
chance of such a program being in the works, the central bank at that point
would probably have to finally take Greek banks off life support.
3.
How does the crisis
affect the global financial system?
Since Greece’s debt crisis began in 2010, most international
banks and foreign investors have sold their Greek bonds and other holdings, so
they are no longer vulnerable to what happens in Greece. (Some private
investors who subsequently plowed back into Greek bonds, betting on a comeback,
regret that decision.)
And in the meantime, the other crisis countries in the eurozone,
like Portugal, Ireland and Spain, have taken steps to overhaul their economies
and are much less vulnerable to market contagion than they were a few years
ago.
Debt in the European Union
Gross government debt as a percentage of gross domestic products
plotted through the fourth quarter of 2014.
Source: Eurostat
Debt in the European Union
What’s more, the European Central Bank has erected powerful
firewalls, by buying huge amounts of euro-zone government bonds and by promising
to purchase more if needed, making governments less subject to market whims.
Still, Greece may be linked to the world financial system in
ways that may not be evident until it defaults on its debts or its banks
collapse. So there is still potential for serious, unpredictable consequences.
4. What will a referendum do?
Prime Minister Alexis Tsipras of Greece surprised the rest of
Europe over the weekend by calling for a referendum that will ask voters
whether to accept terms put forth last week by eurozone creditors — terms he
says are unacceptable.
So far, the creditors have refused to grant an extension of the
current bailout program beyond Tuesday. Without that extension, Greece has no
chance to receive the €7.2 billion remaining in the current program. (The
conditions under which Greece might get that money are what the months of
fighting have been about.)
Any arrangement with Greece after the referendum would, as a
legal matter, require new negotiations and a new program.
On Monday, Jean-Claude Juncker, the president of the European
Commission, who has acted as a broker in the negotiations, called for Greek
voters to accept the terms of the deal. That suggested Mr. Juncker would lay
the groundwork for a resumption of talks on aid to Greece, which might
eventually include discussions to meet Greek demands to lower the country’s
debt.
5. What’s happening at Greece’s banks?
Greek banks are solvent on paper, but lending is practically at
a standstill and they are not able to play the role they should in financing
the economy.
On Sunday, the European Central Bank capped its emergency credit
line for Greek banks at €89 billion. Most if not all of that money has already
been used to cover withdrawals by customers, and there is virtually no money
available for new loans.
Banks may open their doors next week, but it is very unlikely they
will be operating normally for some time to come.
After Cyprus’s banking system collapsed in 2013, it took two
years for the Cypriot government to completely remove restrictions on bank
transfers. And Cyprus had a eurozone bailout program in place — which Greece,
after Tuesday, probably will not.
And if a Greek bank goes bust, it could create havoc in the
financial markets, because Greece has not yet put in place European rules for
the orderly shutdown of failed banks.
6.
How likely is there to
be a ‘Grexit’?
At the height of the debt crisis a few years ago, many experts
worried that Greece’s problems would spill over to the rest of the world. If
Greece defaulted on its debt and exited the eurozone, they argued, it might
create global financial shocks bigger than the collapse of Lehman Brothers did.
Now, however, some people believe that if Greece were to leave
the currency union, known as a “Grexit,” it wouldn’t be such a catastrophe.
Europe has put up safeguards to limit the so-called financial contagion, in an
effort to keep the problems from spreading to other countries. Greece, just a
tiny part of the eurozone economy, could regain financial autonomy by leaving,
these people contend — and the eurozone would actually be better off without a
country that seems to constantly need its neighbors’ support.
Others say that’s too simplistic a view. Despite the frustration
of endless negotiations, European political leaders see a united Europe as an
imperative. At the same time, they still haven’t fixed some of the biggest
shortcomings of the eurozone’s structure by creating a more federal-style
system of transferring money as needed among members — the way the United
States does among its various states.
Exiting the euro currency union and the European Union would
also involve a legal minefield that no country has yet ventured to cross. There
are also no provisions for departure, voluntary or forced, from the euro
currency union.
Investors may also still be betting that Greece will reach a
deal with creditors before or after the referendum, particularly because polls
indicate the majority of Greeks favor sticking with the euro.
7. How did Greece get to this point?
Greece became the epicenter of Europe’s debt crisis after Wall
Street imploded in 2008. With global financial markets still reeling, Greece
announced in October 2009 that it had been understating its deficit figures for
years, raising alarms about the soundness of Greek finances.
Suddenly, Greece was shut out from borrowing in the financial
markets. By the spring of 2010, it was veering toward bankruptcy, which
threatened to set off a new financial crisis.
To avert calamity, the so-called troika — the International
Monetary Fund, the European Central Bank and the European Commission — issued
the first of two international bailouts for Greece, which would eventually
total more than 240 billion euros, or about $264 billion at today’s exchange
rates.
The bailouts came with conditions. Lenders imposed harsh
austerity terms, requiring deep budget cuts and steep tax increases. They also
required Greece to overhaul its economy by streamlining the government, ending
tax evasion and making Greece an easier place to do business.
8.
If Greece has received
billions in bailouts, why is there still a crisis?
The money was supposed to buy Greece time to stabilize its
finances and quell market fears that the euro union itself could break up.
While it has helped, Greece’s economic problems haven’t gone away. The economy
has shrunk by a quarter in five years, and unemployment is above 25 percent.
The bailout money mainly goes toward paying off Greece’s
international loans, rather than making its way into the economy. And the
government still has a staggering debt load that it cannot begin to pay down
unless a recovery takes hold.
Many economists, and many Greeks, blame the austerity measures
for much of the country’s continuing problems. The leftist Syriza party rode to
power this year promising to renegotiate the bailout; Mr. Tsipras said that
austerity had created a “humanitarian crisis” in Greece.
But the country’s exasperated creditors, especially Germany,
blame Athens for failing to conduct the economic overhauls required under its
bailout agreement. They don’t want to change the rules for Greece.
As the debate rages, the only thing everyone agrees on is that
Greece is yet again running out of money — and fast.
Bibliography:
- New York Times
- The Guardian
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