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Eurozone crisis explained Eurozone crisis explained
(14 days later)
What went wrong in Greece?

What went wrong in Greece?

Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.

What went wrong in Greece?

Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.

What went wrong in Greece?

The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.

What went wrong in Greece?

Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.

What went wrong in Greece?

There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes.

What went wrong in Greece?

Eurozone leaders are worried that if Greece were to default, and even leave the euro, it would cause a major financial crisis that could spread to much bigger economies such as Italy and Spain.

What went wrong in Greece?

In 2010, the EU, IMF and ECB agreed a bailout worth 110bn euros (£92bn; $145bn) for Greece. Prime Minister George Papandreou quit the following year while negotiating its follow-up.

What went wrong in Greece?

Lucas Papademos, who succeeded Mr Papandreou, has negotiated a second bailout of 130bn euros, plus a debt writedown of 107bn euros. The price: increased austerity and eurozone monitoring.

What went wrong in Greece?

In May 2012 elections a majority of voters backed parties opposed to austerity, but no group won an overall majority resulting in political deadlock. Fresh elections have been called in June.
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What went wrong in Greece?

What went wrong in Greece?

Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.

What went wrong in Greece?

Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.

What went wrong in Greece?

The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.

What went wrong in Greece?

Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.

What went wrong in Greece?

There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes.

What went wrong in Greece?

Eurozone leaders are worried that if Greece were to default, and even leave the euro, it would cause a major financial crisis that could spread to much bigger economies such as Italy and Spain.

What went wrong in Greece?

In 2010, the EU, IMF and ECB agreed a bailout worth 110bn euros (£92bn; $145bn) for Greece. Prime Minister George Papandreou quit the following year while negotiating its follow-up.

What went wrong in Greece?

Lucas Papademos, who succeeded Mr Papandreou, has negotiated a second bailout of 130bn euros, plus a debt writedown of 107bn euros. The price: increased austerity and eurozone monitoring.

What went wrong in Greece?

In May 2012 elections a majority of voters backed parties opposed to austerity, but no group won an overall majority resulting in political deadlock. Fresh elections have been called in June.
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Eurozone ministers have agreed to give Greece more time to cut its debt levels, but have yet to decide whether to release the next tranche of bailout funds which are needed to keep the country solvent. Eurozone ministers have agreed to cut Greece's debts by a further 40bn euros ($51bn; £32bn), as well as releasing 44bn in bailout money and aid.
The delay comes despite Greece's parliament approving a budget for 2013 that involves 9.4bn euros ($11.9bn; £7.5bn) of cuts in spending, a budget that triggered mass public protests in Athens. A few weeks earlier, they had also agreed to give the government in Athens two more years to cut its overspending.
The government has said that without the next instalment of loans it will run out of cash on Friday 16 November, when 5bn euros of treasury bills mature. That decision came as Greece's parliament approved a budget for 2013 that involves 9.4bn euros of spending cuts, a budget that triggered mass public protests in Athens.
The 31.5bn euros is the latest tranche of rescue money for Greece, which has been struggling with its high debt levels since the financial crisis began. The delay in releasing the latest bailout money was largely due to wrangling between eurozone lenders and the International Monetary Fund (IMF) over whether and by how much to cut Greece's debt, which will inevitably grow even more if Athens continues overspending for longer than previously planned.
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 most other eurozone countries. The government also ran up big debts paying for the 2004 Athens Olympics.
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. Moreover, much of the borrowing was concealed, as successive Greek governments sought to meet the 3%-of-GDP cap on borrowing that is required of members of the euro.
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. When the global financial downturn hit - and Greece's hidden borrowings came to light - the country 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 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. However, 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-sector creditors agreed to write off about three-quarters 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. In the latest agreement, Greece's lenders have found ways to shave an extra 40bn euros off Greece's debtload.
These have had a devastating effect on Greece's already weak economic recovery. The latest Greek budget predicts that the economy will shrink 6.5% this year and a further 4.5% in 2013. Greece has already been in recession for four years. However, in return for all this help, 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.
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. These have had a devastating effect on Greece's already weak economic recovery. The latest Greek budget predicts that the economy will shrink by 6.5% this year and by a further 4.5% in 2013. Greece has already been in recession for four years, and its economy is projected to have shrunk by a fifth between 2008 and the end of this year.
Without economic growth, the Greek government cannot boost its own tax revenues and so has to rely on aid to pay its loans.
Many commentators believe that 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
How does the next tranche get released? Why did it take so long to agree the latest tranche of aid?
Despite Greece approving its tough budget for 2013, the next tranche will not be released immediately as there is still no agreement on how to make the country's debt sustainable. Despite Greece approving its tough budget for 2013, the next tranche was not released immediately as there was no agreement among Greece's lenders on how to make the country's debt sustainable.
Eurozone finance ministers agreed on Monday to give Greece two more years - until 2016 - to meet the deficit reduction targets that are a condition of the bailout loans. Eurozone finance ministers agreed earlier this month to give Greece two more years - until 2016 - to meet the deficit reduction targets that are a condition of the bailout loans.
The key to releasing the next tranche of bailout loans is to reach agreement on how to make Greek debt sustainable again. Greece's debt is currently forecast to hit almost 190% of GDP next year. Eurozone finance ministers meet again on 20 November to discuss releasing the funds. The key to releasing the next tranche of bailout loans was to reach agreement on how to make Greek debt sustainable again. Greece's debt is currently forecast to hit almost 190% of GDP next year.
Once agreement has been reached, national parliaments will need to approve releasing the money. It could potentially take weeks for this to happen. The IMF made clear that it would only consider the debts sustainable if they could be brought down to 120% of GDP by 2020. The IMF will not lend money to a country whose debts it does not deem sustainable.
In the meantime, Greece has been seeking urgent bridge financing in case it does not get the next tranche of bailout aid in time to repay debts. Under the compromise, Greece's debts are now expected to fall to 124% of GDP by 2020.
On Tuesday, it plans to issue bonds, repayable in one and three months' time, to raise about 3bn euros to cover debt repayments due on Friday. The financing would keep Athens afloat until the end of the month. This will be done by cutting the interest rate on existing rescue loans, returning profits earned by the European Central Bank on Greek debts it owns, and helping Greece buy back its private-sector debts at their currently depressed market prices.
It will not involve any write-off of the bailout loans owed by Greece - something that Germany and other lenders said would be unacceptable.
The money will not be released until 14 December, in order to allow national parliaments in eurozone countries time to approve the deal.
What happens next?What happens next?
When Antonis Samaras's New Democracy won the general election in June, he insisted Greece did not need a further bailout but wanted a two-year "breathing space" to meet the tough budget targets attached to the bailout from the EU and IMF.When Antonis Samaras's New Democracy won the general election in June, he insisted Greece did not need a further bailout but wanted a two-year "breathing space" to meet the tough budget targets attached to the bailout from the EU and IMF.
Greece has now been granted the extra time, but major problems remain and the financial markets are still nervous.Greece has now been granted the extra time, but major problems remain and the financial markets are still nervous.
If 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. If Greece's economy continues to contract sharply, the country may not be able to cut its overspending as much as planned, and may ultimately be unable 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 even with the slower rate of austerity that is now planned.
And the extra time given to Greece would mean the eurozone would have to provide extra financing for Athens, which has been estimated at 30bn euros, which would be politically difficult in Germany, which is wary of bailouts.
Why does this matter for the rest of Europe?Why does this matter for the rest of Europe?
It matters a lot. If Greece does not repay its creditors, a dangerous precedent will have been set. This may 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 or even staying inside the euro.
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 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. Moreover, if banks in the weaker eurozone countries that are already struggling to find enough capital are forced to write off even more loans they have made - something that becomes more likely if the eurozone economy falls deeper into recession - they will become weaker still, undermining confidence in the entire banking system.
For example, Greece owes French banks $38bn, German banks $5.5bn, UK banks $8.2bn and US banks $3.5bn. Eurozone banks may then find it even hard to borrow, and therefore to lend, potentially sparking a second credit crunch, where bank lending effectively dries up, hurting the economy further.
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.
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, and setting an even worse precedent.