June 23 A debt crisis in Europe's single currency zone has entered a critical phase with fears Greece could default and spark a global financial disaster like that followed U.S. investment bank Lehman Brothers' collapse in 2008.
European Union leaders are meeting on Thursday and Friday and will try to convince Greeks and financial markets that they have a workable plan to help Athens avoid a debt default and return to financial stability. [ID:nLDE75L1VW]
European Central Bank Executive Board member Juergen Stark told Austrian newspaper Kurier: "After more than three years of fire-fighting we are certainly at the point where more and more rescue measures would be fatal without structural adjustments in the financial system and economic policy." [ID:nWLB6446]
U.S. Federal Reserve Chairman Ben Bernanke said on Wednesday: "If there were a failure to resolve that situation (with Greece), it would pose threats to the European financial system, the global financial system, and to European political unity, I would conjecture, as well."
* June 28 - Greek parliament to vote on a 28 billion euro five-year austerity package agreed with the European Union and International Monetary Fund.
* Main labour unions to launch 48-hour strike on day of austerity vote.
* July 3 - Deadline set by EU for Greek parliament to pass laws implementing the austerity package, including on privatisations, tax rises and spending cuts. Euro zone finance ministers hold an extraordinary meeting the same day and have said Greece must pass the laws by then to obtain its next 12 billion euro tranche of bailout loans.
* Mid-July - Point by which Greece has said it will be unable to pay its debts if it does not get the new loan tranche.
WHAT'S THE PROBLEM?
Greece has a sovereign debt pile of 340 billion euros ($481.5 billion), more than 30,000 euros per person in a population of 11.3 million. The 110-billion-euro bailout Greece accepted last year from the European Union and International Monetary Fund has proved insufficient and a second package worth 120 billion euros is now under discussion. With its debt equivalent to 150 percent of annual output, Greece holds two unwanted world records: the lowest credit rating for a sovereign state, and the most expensive debt to insure. Its people have lost patience with an ever-deepening austerity drive that has slashed public sector wages by a fifth and pensions by a tenth.
Around 53 billion of the original 110 billion euro package has been paid out so far. The government estimates that Greek debt will reach about 350 billion euros at the end of this year, taking in EU/IMF aid tranches including the 12 billion euro emergency loan earmarked for July.
About 70 percent of Greece's debt is held abroad and the remainder at home. Greece is paying an average 4.2 percent interest rate on EU/IMF bailout loans.
Main story [ID:nLDE75L1VW]
Other stories on euro zone crisis [ID:nL6E7HL0JK]
Key hurdles for Greece in coming weeks [ID:nLDE75K1EC]
Graphics on debt crisis r.reuters.com/hyb65p
Bank exposure interactive map r.reuters.com/zag39r
Factbox detailing new austerity [ID:nLDE759159]
WHY DOES IT MATTER OUTSIDE GREECE?
The longer the crisis drags on, the greater the risk that contagion will spread to other troubled euro zone economies like Ireland and Portugal, which have also been bailed out before, and Spain, which is much bigger and would be far more expensive -- perhaps too expensive -- to rescue.
A default by Greece would hammer the banks that hold its debt, including the European Central Bank and big French and German lenders. It could also prompt credit markets to freeze up, as happened after Lehman's demise when banks virtually stopped lending to each other.
The White House said on June 16 the Greek crisis was acting as a headwind to the U.S. economy but opinions vary as to the level of exposure of U.S. banks.
A Greek default would be a catastrophe and a humiliation for the European Union, which launched the euro in 1999 as its most ambitious project and a symbol of the continent's unity. It has prompted some commentators to think the unthinkable: that the euro zone might break up, either by the expulsion of Greece or the departure of Germany, the EU's paymaster, which might be tempted to return to its own currency.
SO WHY NOT JUST BAIL GREECE OUT AGAIN?
The EU's big players -- notably Germany, France and the European Central Bank -- have struggled to work out a rescue mechanism. European governments are keen to avoid a "hard default" because this could threaten banks throughout the euro zone and further afield.
They are therefore discussing a "soft landing" in the form of a debt extension or voluntary rollover by creditors, but some of the proposals have been criticised as a default by another name.
WHO ARE THE KEY PLAYERS?
Greek Prime Minister George Papandreou last week reshuffled his government to quell dissent in his ruling Socialist party and gave the finance portfolio to Evangelos Venizelos, a party rival. Venizelos is a political heavyweight who ran the preparations for the 2004 Athens Olympics, but has no economic track record. Papandreou's government won a confidence vote in parliament on June 22.
At the European level, the single most influential figure is German Chancellor Angela Merkel, as head of the EU's biggest economy. Merkel, who is losing popularity and has suffered a string of defeats in state elections, is under intense pressure from a German public that resents footing the bill for what is widely seen as Greek profligacy -- hence her insistence that banks should share some of the pain. Merkel has been accused of holding up the second Greek aid package, further eroding investor confidence, which could make the bailout more expensive.
WHAT ABOUT THE GREEK PEOPLE?
Public disgruntlement over austerity -- including curbs on widespread early retirement, tax rises and cuts in benefits and wages -- has erupted into frequent strikes and protests, some of them violent. Unemployment is rising. In a poll last month, 80 percent of people said they refused to make any more sacrifices to get more EU/IMF aid. Bank and utility workers, public sector contractors and even doctors have taken to the streets. Private sector workers blame the bloated public sector, civil servants blame tax cheats and many Greeks blame corrupt politicians for the country's problems.
HOW DID IT COME TO THIS?
Greece, whose economy had grown strongly but suffered problems with corruption and bureaucracy, joined the euro zone a decade ago, linking its economy to other European countries.
It went into recession in 2009 after 15 years of growth and its budget deficit hit 15.4 percent of GDP after a series of revisions by the government which revealed the country's economy was in far worse shape than it had previously admitted.
Chronic problems include rampant tax evasion -- the labour minister has estimated a quarter of the economy pays nothing.
More broadly, the Greek crisis reflects an inherent weakness in the euro's structure -- a currency zone with a "one size fits all" interest rate for a set of widely divergent economies, and 17 different countries running their own fiscal policies.