By THE NEW YORK TIMES UPDATED November 9, 2015
Wednesday 18 November 2015
After several contentious months of negotiations between the country and its creditors, Greece received its third bailout in five years. Terms of the bailout including commitments by the country to implement austerity measures and economic reforms, which Greek lawmakers recently approved.
The legislation covered some of the economic changes sought by the country’s international creditors, which include raising the retirement age, cutting pensions, liberalizing the energy market, opening up cosseted professions, expanding a property tax that Greeks already revile and pushing forward a stalled program to privatize state assets.
Passing that package paved the way for Greece to receive the first 2 billion euros, or about $2.3 billion, from the bailout program. But Greece’s international bailout program has hit snags, even before the first euro of loan payouts has been dispensed.
How does the crisis affect the global financial system?
In the European Union, most real decision-making power, particularly on matters involving politically delicate things like money and migrants, rests with 28 national governments, each one beholden to its voters and taxpayers. This tension has grown only more acute since the January 1999 introduction of the euro, which now binds 19 nations into a single currency zone watched over by the European Central Bank but leaves budget and tax policy in the hands of each country, an arrangement that some economists believe was doomed from the start.
Since Greece’s debt crisis began in 2010, most international banks and foreign investors have sold their Greek bonds and other holdings, so they are no longer vulnerable to what happens in Greece. (Some private investors who subsequently plowed back into Greek bonds, betting on a comeback, regret that decision.)
And in the meantime, the other crisis countries in the eurozone, like Portugal, Ireland and Spain, have taken steps to overhaul their economies and are much less vulnerable to market contagion than they were a few years ago.
What if Greece left the eurozone?
At the height of the debt crisis a few years ago, many experts worried that Greece’s problems would spill over to the rest of the world. If Greece defaulted on its debt and exited the eurozone, they argued, it might create global financial shocks bigger than the collapse of Lehman Brothers did.
Now, however, some people believe that if Greece were to leave the currency union, in what is known as a “Grexit,” it wouldn’t be such a catastrophe.
Europe has put up safeguards to limit the so-called 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 by leaving, these people contend — and the eurozone would actually be better off without a country that seems to constantly need its neighbors’ support.
How did Greece get to this point?
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 International Monetary Fund, 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 has there still been 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.
The government will now need to continue implementing deep economic reforms required by the bailout deal Mr. Tsipras brokered in August, a recapitalization of the country’s banks, and the unwinding of capital controls.
Greece’s relations with Europe are in a fragile state, and several of its leaders are showing impatience, unlikely to tolerate the foot-dragging of past administrations. Under the terms of the bailout, Greece must pass dozens of laws before the end of the year, many of them measures that were supposed to have been passed years ago.
Greece’s Creditors: see the plot at the end of the article: Greece’s Debt Crisis Explained