- (source- New York Times)
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Greece narrowly avoided defaulting on its debt on Thursday, Aug.20, making a crucial payment to the European Central Bank after receiving billions of euros in new aid from other eurozone countries.
Later in the day, the country’s prime minister, Alexis Tsipras, called for national elections to be held on Sept. 20. The move is seen as a way for Mr. Tsipras to consolidate his power and press ahead with the bailout plan by asking the citizens to decide whether he and his leftist Syriza party should be returned to power with a new mandate.
Most of the money in the new bailout package will be used to repay existing debt rather than to rebuild the shattered Greek economy. But the new aid may offer some assurances to investors and others that Greece is not about to leave the eurozone.
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 beholden to its voters and taxpayers. This tension has grown only more acute since the January 1999 introduction 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.
Debt in the European Union
Gross government debt as a percentage of gross domestic product plotted through the fourth quarter of 2014.
What if Greece left the eurozone?
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, in what is 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.
Greece’s G.D.P. and Unemployment Rates in Europe
First quarter 2015 average; *Britain is the three-month average through February.
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.
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.
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.
Almost two-thirds of Greece’s debt, about 200 billion euros, is owed to the eurozone bailout fund 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.
So while Greece’s total debt is big—as much as double the country’s annual economic output—it might not matter much if the government did not need to make payments for decades to come. By the time the money came due, the Greek economy could have grown enough that the sum no longer seemed daunting.
In the short term, though, 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 long delays in repayment.