Greeces Debt Crisis Explained

By THE NEW YORK TIMES UPDATED August 11, 2015

How does the crisis affect the global financial system?

In the European Union, most real decision-making power, particularly on matters
involving politically delicate things like money and migrants, rests with 28 national
governments, each one accountable to its voters and taxpayers. This tension has grown
only more acute since the January 1999 introduction of the euro, which now unites 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 Greeces 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 invested money
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.

What if Greece left the eurozone?

At the height of the debt crisis a few years ago, many experts worried that Greeces
problems would spill over to the rest of the world. If Greece defaulted on its debt and
exited the eurozone, they argued that that might create global financial shocks bigger
than the collapse of Lehman Brothers did.

However, some people believe that if Greece were to leave the currency union, in what is
known as a Grexit, it wouldnt 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 and the eurozone would actually be better off without a
country that seems to constantly need its neighbors support.

Others say that is too easy. Despite the frustration of endless negotiations, European
political leaders see a united Europe as an imperative. At the same time, they still
havent fixed some of the biggest shortcomings of the eurozones 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, as of now, no country has done. There are also no provisions for
departure, voluntary or forced, from the euro currency union.

How did Greece get to this point?

Greece became the epicenter of Europes 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 stability 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 start a new financial crisis.

To avoid a major disaster, the 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.

The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring
big budget cuts and large 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.

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 diminish
market fears that the euro union itself could break up. While it has helped, Greeces
economic problems havent 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 Greeces international loans, rather
than making its way into the economy. And the government still has a staggering debt
that it cannot begin to reduce unless a recovery is made.

Many economists, and many Greeks, blame the austerity measures for much of the
countrys continuing problems. The leftist Syriza party was elected this year promising
to renegotiate the bailout; Mr. Tsipras said that austerity had created a humanitarian
crisis in Greece.

But the countrys irritated creditors, especially Germany, blame Athens for failing to
conduct the economic overhauls required under its bailout agreement. They dont want
to change the rules for Greece.

Almost two-thirds of Greeces debt, about 200 billion euros, is owed to the eurozone
bailout or other eurozone countries. Greece does not have to make any payments on that
debt until 2023. The International Monetary Fund has proposed extending the grace
period until mid-century.

In the short term, Greece has a problem making payments due on loans from the
International Monetary Fund and on bonds held by the European Central Bank. Those
obligations amount to more than 24 billion euros through the middle of 2018, and it is
unlikely that either institution would agree to extend their grace periods.
 Vocabulary

Overhaul: to completely change current situation; repair or renew.

Contagion: to contaminate or infect.

Spill over: to overflow or be forced out of an area; leak into.

Defaulted: fail to meet financial obligations; nonpayment.

Safeguard: something that protects or ensures safety.

Shortcomings: failures or weaknesses.

Reeling: to feel dizzy or whirling; spinning.

Understate: to say something is less than it is; undervalue.

Veering: to change direction suddenly

Bailout: rescuing someone, especially financially.

Streamline: change something to make it simpler or more efficient.

Grace period: a period of time after a payment is due; like a suspension of the payment.