July 4 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 the one that
followed U.S. investment bank Lehman Brothers' collapse in 2008.
Austerity plans have caused big street protests in Athens.
* Credit ratings agency Standard & Poor's cast new
uncertainty on Monday over euro zone efforts to
rescue debt-crippled Greece by warning it would treat a French
bank plan for a rollover of privately-held debt as a default.
* While S&P's statement did not deal a death blow to the
French rollover plan, seen by critics as a bailout for
creditor banks rather than for Greece, it highlighted the
difficulty of arranging private sector involvement in a second
* On Saturday, euro zone finance ministers threw a lifeline
to the socialist government of Prime Minister George Papandreou
and approved a 12-billion euro loan Greece needs to avert
* Jean-Claude Juncker, the chairman of euro zone finance
ministers, said Athens faced a severe loss of its sovereignty
with increasingly intrusive outside supervision of its fiscal
policy and privatisation agency.
* Greece last week passed austerity measures worth 28
billion euros ($40 billion) and promised to deliver 50 billion
euros in sell-off revenues by 2015, including raising 5 billion
euros by the end of this year alone. On the list are public
utilities whose sale is sure to prompt public reaction.
Wrapup story [ID:nL6E7I408N]
Other stories on euro zone crisis [nTOPEURO]
Graphics on debt crisis r.reuters.com/hyb65p
Bank exposure interactive map r.reuters.com/zag39r
Factbox on revised austerity plan [ID:nLDE75N0NB]
BREAKINGVIEWS column [ID:nL6E7I4062]
* Greece will this week work on launching sell-offs,
reforming its tax system and pushing reforms to meet EU and IMF
conditions amid warnings the cash comes with strings attached.
* The IMF will meet on July 8 to approve the 12-billion euro
loan tranche, which is expected to be handed over by July 15 and
allow Greece to avoid the immediate threat of debt default.
* Finance ministers of the 17-nation currency area are due to
agree on the outlines of the second Greek rescue package, after
last year's 110 billion euro bailout, at a meeting in Brussels
next week, but details will not be signed off until September.
WHAT'S THE PROBLEM?
Greece has a sovereign debt pile of 350 billion euros ($510
billion), more than 30,000 euros for each of its 11.3 million
people. The 110-billion-euro bailout Greece accepted last year
from the European Union and the International Monetary Fund has
proved insufficient and the second package worth about the same
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 cut 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.
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.
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 were 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
WHO ARE THE KEY PLAYERS?
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 and a
vote to pass the austerity package on June 29.
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
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 recent poll, 80
percent of people said they would refuse 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 its 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.
How the crisis plays out may determine the failure or
survival of the project.
(Editing by Peter Millership and Dina Kyriakidou)