Greece’s Debt Crisis Explained
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 situation could create instability in the region and reverberate around the globe.
Banks and markets throughout the country are closed until next week, after Prime Minister Alexis Tsipras interrupted last-ditch debt negotiations early Saturday with the announcement that he was calling a referendum for Sunday, July 5 on whether to accept the tough terms offered by international creditors.
On Sunday, the European Central Bank said it would not expand an emergency loan program that has been propping up Greek banks in recent weeks. But at the same time, the central bank did not cut off support entirely, giving the Greek government some extra flexibility in the coming days.
2. Will Greece default on its debt?
Greece will almost certainly miss a repayment of more than 1.5 billion euros, or $1.7 billion, to the I.M.F. that is due by midnight Tuesday.
But that won’t necessarily put Greece in default with the I.M.F. The fund, if it follows tradition in such matters, could buy time by simply declaring Greece to be in arrears.
Missing the payment, though, could make it even more difficult for the European Central Bank to continue extending emergency loans to Greek banks. The central bank is allowed to finance only solvent banks. Because Greece’s banks and the government are tightly linked, it would be hard to consider Greek banks solvent when their government is not paying its bills.
Greece’s G.D.P. and Unemployment Rates in Europe
First quarter 2015 average; *Britain is the three-month average through February.
3. 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.
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.
The president of the European Commission, Jean-Claude Juncker, said the momentum in negotiations between Greece and its international creditors had been shattered by the announcement of a referendum.
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