How did Greece come to its current state of affairs? Here's a quick primer on what went wrong, and the critical steps the country still needs to take to avoid default.
June 30: Greek parliament, a day after approving a five-year austerity plan, votes on laws detailing specific implementation measures for the package.
July 3: Deadline set by EU for Greek parliament to pass laws implementing the package, including on privatization, tax rises and spending cuts. Euro zone finance ministers will hold an extraordinary meeting the same day and have said Greece must pass the laws by then to obtain its next 12 billion euro tranche of bailout loans.
Mid-July: Point by which Greece has said it will be unable to pay its debts if it does not get the new loan tranche.
What's the Problem?
What's the Problem?
Greece has a sovereign debt pile of 340 billion euros ($480 billion), more than 30,000 euros for each of its 11.3 million people. The 110 billion euro bailout Greece accepted last year from the European Union and International Monetary Fund has proved insufficient and a second package worth 120 billion euros is now under discussion. With its debt equivalent to 150 percent of annual output, Greece holds two unwanted world records: the lowest credit rating for a sovereign state, and the most expensive debt to insure. Its people have lost patience with an ever-deepening austerity drive that has slashed public sector wages by a fifth and pensions by a tenth.
Around 53 billion of the original 110 billion euro package has been paid out so far. The government estimates that Greek debt will reach about 350 billion euros at the end of this year, taking in EU and IMF aid tranches including the 12 billion euro emergency loan earmarked for July. About 70 percent of Greece's debt is held abroad and the remainder at home. Greece is paying an average 4.2 percent interest rate on EU/IMF bailout loans.The longer the crisis drags on, the greater the risk that contagion will spread to other troubled euro zone economies like Ireland and Portugal, which have also been bailed out before, and Spain, which is much bigger and would be far more expensive — perhaps too expensive — to rescue. A default by Greece would hammer the banks that hold its debt, including the European Central Bank and big French and German lenders. It could also prompt credit markets to freeze up, as happened after Lehman's demise when banks virtually stopped lending to each other.
Why Does It Matter Outside of Greece?
Why Does It Matter Outside of Greece?
The White House said on June 16 the Greek crisis was acting as a headwind to the U.S. economy but opinions vary as to the level of exposure of U.S. banks. A Greek default would be a catastrophe and a humiliation for the European Union, which launched the euro in 1999 as its most ambitious project and a symbol of the continent's unity. It has prompted some commentators to think the unthinkable: that the euro zone might break up, either by the expulsion of Greece or the departure of Germany, which might be tempted to return to its own currency.
So Why Not Just Bail Out Greece Again?
The EU's big players - notably Germany, France and the European Central Bank - have struggled to work out a rescue mechanism. European governments are keen to avoid a "hard default" because this could threaten banks throughout the euro zone and further afield. They were therefore discussing a "soft landing" in the form of a debt extension or voluntary rollover by creditors, but some of the proposals have been criticized as a default by another name.
Who Are the Key Players?
Greek Prime Minister George Papandreou last week reshuffled his government to quell dissent in his ruling Socialist party and gave the finance portfolio to Evangelos Venizelos, a party rival. Venizelos is a political heavyweight who ran the preparations for the 2004 Athens Olympics, but has no economic track record. Papandreou's government won a confidence vote in parliament on June 22 and a vote to pass the austerity package on June 29.
At the European level, the single most influential figure is German Chancellor Angela Merkel, as head of the EU's biggest economy. Merkel, who is losing popularity and has suffered a string of defeats in state elections, is under intense pressure from a German public that resents footing the bill for what is widely seen as Greek profligacy—hence her insistence that banks should share some of the pain. Merkel has been accused of holding up the second Greek aid package, further eroding investor confidence, which could make the bailout more expensive.
What About the Greek People?
Public disgruntlement over austerity — including curbs on widespread early retirement, tax rises and cuts in benefits and wages—has erupted into frequent strikes and protests, some of them violent. Unemployment is rising. In a poll last month, 80 percent of people said they would refuse to make any more sacrifices to get more EU and IMF aid. Bank and utility workers, public sector contractors and even doctors have taken to the streets. Private sector workers blame the bloated public sector, civil servants blame tax cheats and many Greeks blame corrupt politicians for the country's problems.
How Did It Come to This?
Greece, whose economy had grown strongly but suffered problems with corruption and bureaucracy, joined the euro zone a decade ago, linking its economy to other European countries. It went into recession in 2009 after 15 years of growth and its budget deficit hit 15.4 percent of GDP after a series of revisions by the government, which revealed its economy was in far worse shape than it had previously admitted.
Chronic problems include rampant tax evasion — the labor minister has estimated a quarter of the economy pays nothing. More broadly, the Greek crisis reflects an inherent weakness in the euro's structure — a currency zone with a "one size fits all" interest rate for a set of widely divergent economies, and 17 different countries running their own fiscal policies. How the crisis plays out will determine the failure or survival of the project.
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