What Is the Greece Debt Crisis?
7/03/2015 08:14:00 AM
When Greece joined the euro in 2001, confidence in the Greek economy grew and a big economic boom followed. But after the 2008 financial crisis, everything changed. Every country in Europe entered a recession, but because Greece was one of the poorest and most indebted countries, it suffered the most. The unemployment rate reached 28 percent in 2013, worse than the United States suffered during the Great Depression.
If Greece wasn't in the euro, it could have boosted its economy by printing more of its currency, the drachma. This would have lowered the value of the drachma in international markets, making Greek exports more competitive. It would also lower domestic interest rates, encouraging domestic investment and making it easier for Greek debtors to service their debts.
But Greece shares its monetary policy with the rest of Europe. And the German-dominated European Central Bank has given Europe a monetary policy that's about right for Germany, but so tight that it has thrust Greece into a depression.
So Greece is squeezed between a crushing debt burden — 177 percent of GDP, about twice the level in the United States — and a deep depression that makes it difficult to raise the money it needs to make its debt payments.
For the last five years, Greece has been negotiating with European Commission, the European Central Bank, and the International Monetary Fund (dubbed "the Troika") for financial assistance with its debt burden. Since 2010, the Troika has been providing Greece with loans in exchange for tax hikes and spending cuts.
But he has very little leverage. In 2010, Greek debt was widely held by private banks, so a Greek default could trigger a financial panic. But since then, this debt has been consolidated in the hands of rich European governments, greatly reducing the risk of a financial crisis if Greece defaults.
So Greece faces a hard choice: it can accept the Troika's demands for further austerity. Or it can defy the Troika, which would likely lead to a default on Greek debt and possibly a Greek exit from the euro. The Greek government is holding a referendum on July 5 to let voters choose between these bad options.
In the meantime, the Greek economy is melting down. Knowing that Greek euro deposits could soon be transformed into devalued drachma deposits, Greek people have been rushing to ATMs to withdraw as much cash as they can. That has forced the Greek government to close the banks and limit withdrawals to €60 per day.
Did Greece default on its debt?
When borrowers — whether they are countries, companies or individuals — do not pay their debts on time, they are in default. For practical purposes, then, Greece — which on Tuesday failed to make a scheduled debt repayment of about 1.5 billion euros, or $1.7 billion, to the I.M.F. — has defaulted.The I.M.F., however, does not use term default. It instead places countries that miss their payments in what it calls arrears.Semantics aside, missing the payment might lead to a situation in which other large Greek debts are classified as being in default.
A default, even when it is not called one, is an event that can have serious repercussions for a country’s economy and relations with other nations. Defaults can upset financial markets, create uncertainty for other lenders, and generally crimp economic activity
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.
How does the crisis affect the global financial system?
Europe is a union in which most real decision-making power, particularly on matters involving politically delicate things like money and migrants, rests with 28 national governments, each one beholden to its voters and taxpayers. This tension has grown only more acute since the January 1999 launch of the euro, which now binds 19 nations into a single currency zone watched over by the European Central Bank but leaves budget and tax policy in the hands of each country, an arrangement that some economists believe was doomed from the start.
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.
0 comments