June 20 A debt crisis in Europe's 17-nation
single currency zone has entered a new and critical phase, with
fears that Greece could default and spark a global financial
disaster like that which followed the collapse of
U.S. investment bank Lehman Brothers in 2008.
Euro zone finance ministers have told Greece it has to
approve stricter austerity measures before a final decision is
made on the next tranche of EU/IMF loans.
Ahead of a second day of meetings in Luxembourg on Monday,
ministers indicated that the 12 billion euros in aid would be
paid by mid-July, allowing Athens to avoid default, but said the
country had to show progress on plans to cut spending, raise
taxes and generate other revenue streams first. [ID:nLDE75J0G2]
In Athens, anti-austerity demonstrators were gathered in the
central square outside parliament, but there were no new clashes
with security forces. Power workers began a strike and blackouts
were expected in parts of the country.
Greek legislators debated the highly unpopular plans in
parliament ahead of a confidence vote due on Tuesday night.
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 it
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
run out of patience with an ever-deepening austerity drive that
has slashed public sector wages by a fifth and pensions by a
Analysis on Papandreou reshuffle [ID:nLDE75E0TK]
Other stories on euro zone crisis [ID:nLDE68T0MG]
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
It could also prompt credit markets to freeze up, as
happened after Lehman's collapse 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" as that 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 default by another
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
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 1defeats 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 anger 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.
"The big problem of Greek society is the tendency to
consider somebody else is responsible for everything that goes
wrong," said analyst Theodore Couloumbis.
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 structure of the euro -- 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 will determine the failure or survival
of the project.
(Writing by Mark Trevelyan and Philippa Fletcher; Editing by