Explaining the Greek Debt Crisis and What It Means for the Eurozone

Greece, the weak link in the eurozone, is inching closer to defaulting on its debt. The country has been in a long standoff with its European creditors on the terms of a multibillion-dollar bailout. If the country goes bankrupt or decides to leave the 19-nation eurozone, the situation could create instability in the region and reverberate around the globe.

What’s the latest?

Banks and markets throughout the country are closed until next week, after Prime Minister Alexis Tsipras interrupted last-ditch debt negotiations early Saturday with the announcement that he was calling a referendum for July 5 on whether to accept the tough terms offered by international creditors.

On Sunday, the European Central Bank said it would not expand the emergency loan program that has been propping up Greek banks in recent weeks. But at the same time, the bank did not cut off support entirely, giving the Greek government some extra flexibility in the coming days.

Greece became the epicenter of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances.

Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.

To avert calamity, the so-called troika — the I.M.F., the European Central Bank and the European Commission — issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at today’s exchange rates.

The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.

If Greece has received billions in bailouts, why is there still a crisis?

The money was supposed to buy Greece time to stabilize its finances and quell market fears that the euro union itself could break up. While it has helped, Greece’s economic problems haven’t gone away. The economy has shrunk by a quarter in five years, and unemployment is above 25 percent.

The bailout money mainly goes toward paying off Greece’s international loans, rather than making its way into the economy. And the government still has a staggering debt load that it cannot begin to pay down unless a recovery takes hold.

Many economists, and many Greeks, blame the austerity measures for much of the country’s continuing problems. The leftist Syriza party rode to power this year promising to renegotiate the bailout; Mr. Tsipras said that austerity had created a “humanitarian crisis” in Greece.

But the country’s exasperated creditors, especially Germany, blame Athens for failing to conduct the economic overhauls required under its bailout. They don’t want to change the rules for Greece.

Why do Greece and Europe disagree?

With Greece nearly bankrupt, the government struck a deal with European officials on Feb. 20 to extend the bailout program for at least four months and give Athens €7 billion in funds, if Mr. Tsipras made structural changes. But creditors say the plans Greece has submitted fall short, and they accuse Mr. Tsipras of trying to roll back the austerity measures unilaterally.

Greece needs a deal to keep paying its creditors and to finance government operations. Athens seems to be betting that its creditors will want to reach a compromise to avoid the huge unknowns that could arise if Greece defaults or possibly leaves the euro.

If things are so bad, shouldn’t Greece just leave the eurozone?

At the height of the debt crisis a few years ago, many experts worried that Greece’s problems would spill over into the rest of the world. If Greece defaulted on its debt and exited the eurozone, it could create global financial shocks bigger than the collapse of Lehman Brothers.

Some people argue that if Greece were to leave the currency union now, it wouldn’t be such a catastrophe. Europe has put up safeguards to limit the financial contagion, in an effort to keep the problems from spreading to other countries. Greece, just a tiny part of the eurozone economy, could regain financial autonomy with its own economy, these people contend — and the eurozone would actually be better off without a country that seems to constantly need its neighbors’ support.

Others say that’s too simplistic a view. Despite the frustration of endless negotiations, European political leaders see a united Europe as an imperative. At the same time, they still haven’t fixed some of the biggest shortcomings of the eurozone’s structure by creating a more federal-style system of transferring money as needed among members — the way the United States does among its various states. They also worry that if Greece were to default and leave the eurozone, it could ignite turmoil in the financial markets that might stall the budding recovery in Europe and impede the United States’ rebound.

What happens next? That’s the billion-euro question.

Mr. Tsipras has said he doesn’t want to take Greece out of the euro currency union. Chancellor Angela Merkel of Germany, Europe’s paymaster, says the eurozone must stay together — but not at any cost.

Right now, Greece must work out a deal to get some of the €7 billion to meet looming debt payments. It also has billions more in additional payments coming due later this year to the I.M.F. and the European Central Bank. As a result, Greece might need to try securing yet another multibillion-euro bailout package — its third since 2010.

Next week’s referendum could test whether Greek citizens want to stay in the eurozone. New elections could also be held if Greece’s financial situation worsens. Or Greece could test the willingness of Russia or China to help should talks with Europe falter.

The heavy betting is that Greece and Europe will find a way to muddle through the mess yet again — even if many people might be quietly drawing up emergency plans.

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