INTERNATIONAL BUSINESS 

Greece’s Debt Crisis Explained

By THE NEW YORK TIMES
A father and daughter at a demonstration in Athens on Tuesday. Greek citizens will decide whether to accept the terms of a bailout deal proposed by the country’s creditors. Eirini Vourloumis for The New York Times
Greece, the weak link in the eurozone, is inching closer to defaulting on its debt. The country has been in a long standoff with its European creditors on the terms of a multibillion-dollar bailout. If the country goes bankrupt or decides to leave the 19-nation eurozone, the Greek debt crisis could create instability in the region and reverberate around the globe.
  1. What’s the latest?
    Prime Minister Alexis Tsipras said in a letter sent to creditors on Tuesday that Greece was “prepared to accept” a deal offered over the weekend, with small modifications to some of the central points of contention on issues like pension cuts and tax increases. In a televised address on Wednesday, he then urged Greeks to vote “no” in an upcoming referendum on the deal in an effort to improve his negotiating position with European officials.
    The Eurogroup of finance ministers held a conference after the address and said they will wait for the outcome of Greece’s referendum on Sunday before making decisions on how to proceed.
    On Tuesday, the country missed a Tuesday deadline to repay roughly 1.5 billion euros, or $1.7 billion, to the International Monetary Fund.
  2. 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 International Monetary Fund — 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.

    Greece’s G.D.P. and Unemployment Rates in Europe

    First quarter 2015 average; *Britain is the three-month average through February.
    Source: Eurostat
  3. What happens next?
    That’s the billion-euro question.
    Sunday’s referendum will test whether Greek citizens want to stay in the eurozone. New elections could also be held if Greece’s financial situation worsens. Or Greece could test the willingness of Russia or China to help should talks with Europe falter.
    Some people are now saying that the real deadline is late July, after all the warnings that Tuesday was the make-or-break day. July is when Greece owes the European Central Bank a 3.5 billion euro payment. If there is no international bailout program in place by that time, and little chance of such a program being in the works, the central bank at that point would probably have to finally take Greek banks off life support.
  4. How does the crisis affect the global financial system?
    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.
    Source: Eurostat
    What’s more, the European Central Bank has erected powerful firewalls, by buying huge amounts of eurozone government bonds and by promising to purchase more if needed, making governments less subject to market whims.
    Still, Greece may be linked to the world financial system in ways that may not be evident until it defaults on its debts or its banks collapse. So there is still potential for serious, unpredictable consequences.
  5.  
    PLAY VIDEO 00:52
    The president of the European Commission, Jean-Claude Juncker, said Monday the momentum in negotiations between Greece and its international creditors had been shattered by the announcement of a referendum. Video by Reuters on June 29, 2015
    What will a referendum do?
    Mr. Tsipras’s letter left unclear what Greeks would be voting on in the referendum on Sunday. The wording was to ask Greeks to vote yes or no on whether they supported the terms offered by creditors last week — an offer that in effect expired with the existing bailout package on Tuesday night, and that appears to have been supplanted in any case by the offer put forward by Mr. Tsipras.
    Nonetheless, Mr. Tsipras went on public television Wednesday afternoon, telling Greeks that they should vote “no” in the referendum in order to improve his negotiating position.
    Meanwhile, Chancellor Angela Merkel of Germany has repeated her position that there should be no further negotiations until the referendum — a vote that some are hoping will amount to a rebuke of Mr. Tsipras.
  6.  
    PLAY VIDEO 00:40
    People waited in front of the National Bank of Greece in Athens on Wednesday to receive part of their pensions for July. Video by Reuters on July 01, 2015
    What’s happening at Greece’s banks?
    Greek banks are solvent on paper, but lending is practically at a standstill and they are not able to play the role they should in financing the economy.
    On Sunday, the European Central Bank capped its emergency credit line for Greek banks at €89 billion. Most if not all of that money has already been used to cover withdrawals by customers, and there is virtually no money available for new loans.
    After Cyprus’s banking system collapsed in 2013, it took two years for the Cypriot government to completely remove restrictions on bank transfers. And Cyprus had a eurozone bailout program in place — which Greece, after Tuesday, probably will not.
    And if a Greek bank goes bust, it could create havoc in the financial markets, because Greece has not yet put in place European rules for the orderly shutdown of failed banks.
  7. How likely is there to be a ‘Grexit’?
    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, 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.
    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.
    Investors may also still be betting that Greece will reach a deal with creditors before or after the referendum, particularly because polls indicate the majority of Greeks favor sticking with the euro.
  8.  
    PLAY VIDEO 3:52
    A 2013 video on how Greeks were turning to dirty and environmentally damaging solutions for heat after the government raised taxes on heating oil by 450 percent.Video by Nikolia Apostolou on February 03, 2013
    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.
  9. 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.
James Kanter, Jim Yardley, Jack Ewing, Niki Kitsantonis, Suzanne Daley, Liz Alderman, Peter Eavis and Andrew Higgins contributed reporting.