This article is from the source 'bbc' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.
You can find the current article at its original source at http://www.bbc.co.uk/go/rss/int/news/-/news/business-13798000
The article has changed 35 times. There is an RSS feed of changes available.
Previous version
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
Next version
Version 30 | Version 31 |
---|---|
Eurozone crisis explained | Eurozone crisis explained |
(2 months later) | |
BACK {current} of {total} NEXT | BACK {current} of {total} NEXT |
Greece's centre-right Prime Minister Antonis Samaras wants a two-year "breathing space" to meet the tough budget targets attached to Greece's bailout from the EU and IMF. | |
He insists it does not mean a further bailout - just more time, as political turmoil this year delayed some fundamental economic reforms. | |
Yet after months of refusing to countenance the possibility of Greece leaving the euro, eurozone politicians have slowly come round to thinking there may be no option but to let the heavily indebted country go. | |
Mr Samaras formed a new coalition after the general election on 17 June. But the powerful left-wing Syriza bloc, hostile to the bailout, came second - not far behind Mr Samaras's New Democracy party. | |
Germany, the most powerful economy in the eurozone by far, insists that the loan terms are not negotiable. | |
Why is Greece in trouble? | Why is Greece in trouble? |
Greece was living beyond its means even before it joined the euro. After it adopted the single currency, public spending soared. | Greece was living beyond its means even before it joined the euro. After it adopted the single currency, public spending soared. |
Public sector wages, for example, rose 50% between 1999 and 2007 - far faster than in other eurozone countries. | Public sector wages, for example, rose 50% between 1999 and 2007 - far faster than in other eurozone countries. |
And while money flowed out of the government's coffers, its income was hit by widespread tax evasion. So, after years of overspending, its budget deficit - the difference between spending and income - spiralled out of control. | And while money flowed out of the government's coffers, its income was hit by widespread tax evasion. So, after years of overspending, its budget deficit - the difference between spending and income - spiralled out of control. |
When the global financial downturn hit, therefore, Greece was ill-prepared to cope. | When the global financial downturn hit, therefore, Greece was ill-prepared to cope. |
Debt levels reached the point where the country was no longer able to repay its loans, and was forced to ask for help from its European partners and the International Monetary Fund (IMF) in the form of massive loans. | Debt levels reached the point where the country was no longer able to repay its loans, and was forced to ask for help from its European partners and the International Monetary Fund (IMF) in the form of massive loans. |
In the short term, however, the conditions attached to these loans have compounded Greece's woes. | In the short term, however, the conditions attached to these loans have compounded Greece's woes. |
What has been done to help Greece? | What has been done to help Greece? |
In short, a lot. | In short, a lot. |
In May 2010, the European Union and IMF provided 110bn euros ($140bn: £88bn) of bailout loans to Greece to help the government pay its creditors. | In May 2010, the European Union and IMF provided 110bn euros ($140bn: £88bn) of bailout loans to Greece to help the government pay its creditors. |
It soon became apparent that this would not be enough, so a second, 130bn-euro bailout was agreed earlier this year. | It soon became apparent that this would not be enough, so a second, 130bn-euro bailout was agreed earlier this year. |
As well as these two loans, which are made in stages, the vast majority of Greece's private creditors agreed to write off more than half of the debts owed to them by Athens. They also agreed to replace existing loans with new loans at a lower rate of interest. | As well as these two loans, which are made in stages, the vast majority of Greece's private creditors agreed to write off more than half of the debts owed to them by Athens. They also agreed to replace existing loans with new loans at a lower rate of interest. |
However, in return for all these loans, the EU and IMF insisted that Greece embark on a major austerity drive involving drastic spending cuts, tax rises, and labour market and pension reforms. | However, in return for all these loans, the EU and IMF insisted that Greece embark on a major austerity drive involving drastic spending cuts, tax rises, and labour market and pension reforms. |
These have had a devastating effect on Greece's already weak economic recovery. The European Commission expects the Greek economy to shrink by another 4.7% this year. Greece has already been in recession for four years. | |
Without economic growth, Greece cannot boost its own income and so has to rely on aid to pay its loans. Many commentators believe even the combined 240bn euros of loans and the debt write-off will not be enough. | Without economic growth, Greece cannot boost its own income and so has to rely on aid to pay its loans. Many commentators believe even the combined 240bn euros of loans and the debt write-off will not be enough. |
Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full | Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full |
What happens next? | What happens next? |
The result of the general election on 17 June was greeted with relief in eurozone capitals, the EU and IMF. | The result of the general election on 17 June was greeted with relief in eurozone capitals, the EU and IMF. |
The win for New Democracy has, for the time being, eased fears that Greece is about to leave the eurozone. | |
Yet major problems remain and the financial markets are still nervous. | Yet major problems remain and the financial markets are still nervous. |
It Greece's economy continues to contract sharply, the country may not be able to repay its debts, meaning it will need further help. If the rest of Europe is no longer willing to provide it, then Greece may be forced to leave the euro. | It Greece's economy continues to contract sharply, the country may not be able to repay its debts, meaning it will need further help. If the rest of Europe is no longer willing to provide it, then Greece may be forced to leave the euro. |
There is, of course, the possibility that the Greek people, fed up with rising unemployment and falling living standards, will make it impossible for the government to continue with austerity. | There is, of course, the possibility that the Greek people, fed up with rising unemployment and falling living standards, will make it impossible for the government to continue with austerity. |
However, European leaders are hoping that the Greek economy will slowly begin to recover, thanks to the wide-ranging reforms insisted upon by the EU and IMF, allowing Greece to make its repayments and once again, stand on its own two feet. | However, European leaders are hoping that the Greek economy will slowly begin to recover, thanks to the wide-ranging reforms insisted upon by the EU and IMF, allowing Greece to make its repayments and once again, stand on its own two feet. |
Why does this matter for the rest of Europe? | Why does this matter for the rest of Europe? |
It matters a lot. | It matters a lot. |
If Greece does not repay its creditors, a dangerous precedent will have been set. This will make investors increasingly nervous about the likelihood of other highly-indebted nations, such as Italy, or those with weak economies, such as Spain, repaying their debts. If investors stop buying bonds issued by other governments, then those governments in turn will not be able to repay their creditors - a potentially disastrous vicious circle. | If Greece does not repay its creditors, a dangerous precedent will have been set. This will make investors increasingly nervous about the likelihood of other highly-indebted nations, such as Italy, or those with weak economies, such as Spain, repaying their debts. If investors stop buying bonds issued by other governments, then those governments in turn will not be able to repay their creditors - a potentially disastrous vicious circle. |
To combat this risk, European leaders have agreed a 700bn-euro firewall to protect the rest of the eurozone from a full-blown Greek default. | To combat this risk, European leaders have agreed a 700bn-euro firewall to protect the rest of the eurozone from a full-blown Greek default. |
Equally, if banks that are already struggling to find enough capital are forced to write off money over and above that which they have already agreed to, they will become weaker still, undermining confidence in the entire global banking system. Banks would then be even more reluctant, and less able, to lend to one another, potentially sparking a second credit crunch, where bank lending effectively dries up. | Equally, if banks that are already struggling to find enough capital are forced to write off money over and above that which they have already agreed to, they will become weaker still, undermining confidence in the entire global banking system. Banks would then be even more reluctant, and less able, to lend to one another, potentially sparking a second credit crunch, where bank lending effectively dries up. |
For example, Greece owes French banks $38bn, German banks $5.5bn, UK banks $8.2bn and US banks $3.5bn. | |
This problem would be exacerbated by savers and investors taking money out of banks in vulnerable economies, such as Greece, Portugal and Spain, and moving it to banks in safer economies such as Germany or the Netherlands. This could lead to more banks defaulting on their loans. | This problem would be exacerbated by savers and investors taking money out of banks in vulnerable economies, such as Greece, Portugal and Spain, and moving it to banks in safer economies such as Germany or the Netherlands. This could lead to more banks defaulting on their loans. |
These potential scenarios would be made immeasurably worse if Greece were to leave the euro. The country would almost certainly reintroduce the drachma, which would devalue dramatically and quickly, making it even harder for Greece to repay its debts. | These potential scenarios would be made immeasurably worse if Greece were to leave the euro. The country would almost certainly reintroduce the drachma, which would devalue dramatically and quickly, making it even harder for Greece to repay its debts. |