Quick Guide to the Greek crisis
ATHENS (Reuters) - A debt crisis in Europe's 17-nation single currency zone has entered a new and critical phase, with fears that Greece could default and spark a global financial disaster like that which followed the collapse of U.S. investment bank Lehman Brothers in 2008.
Greek Prime Minister George Papandreou sacrificed his unpopular finance minister Friday and gave the job to party rival Evangelos Venizelos, previously in charge of defence.
The leaders of France and Germany said they were united behind a new aid package for Greece in which banks that hold Greek debt would voluntarily shoulder some of the burden.
WHAT'S THE PROBLEM?
Greece has a sovereign debt pile of 340 billion euros $481.5 billion (297.7 billion pounds), more than 30,000 euros per person in a population of 11.3 million. It has been rescued once already, accepting a 110 billion euro bailout last year from the European Union and International Monetary Fund. But that has proved insufficient and a second package worth 120 billion euros is now under discussion. Until future funding is agreed, at least in principle, doubt hangs over payment of the next 12 billion euro slice of the first package, which is due on June 29. 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 run out of patience with an ever-deepening austerity drive that has slashed public sector wages by a fifth and pensions by a tenth, and violent protests broke out in Athens this week.
WHY DOES IT MATTER OUTSIDE GREECE?
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 collapse when banks virtually stopped lending to each other.
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, the EU's paymaster, which might be tempted to return to its own currency.
SO WHY NOT JUST BAIL GREECE OUT 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" as that could threaten banks throughout the euro zone and further afield.
They are therefore discussing a "soft landing" in the form of a debt extension or voluntary rollover by creditors, but some of the proposals have been criticised as default by another name.
WHO ARE THE KEY PLAYERS?
Under increasing pressure from street unrest and a split in his own party, Greek Prime Minister George Papandreou tried unsuccessfully this week to form a national unity government. He gave the finance portfolio Friday 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.
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 anger 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 refused to make any more sacrifices to get more EU/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.
"The big problem of Greek society is the tendency to consider somebody else is responsible for everything that goes wrong," said analyst Theodore Couloumbis.
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 the country's economy was in far worse shape than it had previously admitted.
Chronic problems include rampant tax evasion -- the labour minister has estimated a quarter of the economy pays nothing.
More broadly, the Greek crisis reflects an inherent weakness in the structure of the euro -- 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.
- Tweet this
- Share this
- Digg this
- UPDATE 1-Don't mess with nuclear Russia, Putin says
- Scotland's pro-independence campaign gains on final TV debate - poll
- Exclusive - Over 100 Russian soldiers killed in single Ukraine battle - Russian rights activists
- Ukraine says Russian tanks flatten town; EU to threaten more sanctions |
- Man charged with attacking British MP on London street