Greek debt crisis: Everything you need to know
Greece must come up with a loan payment of $1.8 billion to the International Monetary Fund by Tuesday to avoid a default. Greece and its creditors are still squabbling over a final deal as the clock ticks and next week's deadline looms.
Here is what you need to know:
Why is Greece in debt?
Just like a household that spends more money each month than it brings in, Greece has piled up a mountain of debt by spending beyond its means.
"Constant government borrowing to fund promises by politicians" has caused Greece's cash crunch, says David Kotok, chief investment officer at Cumberland Advisors.
Making matters worse, for the purposes of paying out benefits, Greece has a retirement age of 57. That's low compared to the U.S., where retirees can start taking benefits at age 62. While retiring early is good for Greek workers, it creates a major financial burden on the government. Tax evasion in Greece is also legendary, and when taxpayers dodge their obligations it means less revenue for the debt-strapped government.
Who loaned them money? Why?
At first, Athens borrowed billions of dollars from European banks to make ends meet (those same banks agreed to a 50% haircut on those loans in October 2011). But Greece couldn't come up with the cash to pay off those loans, further exacerbating the debt problem. Greece was no longer able to raise funds from the public markets as investors feared they wouldn't get their money back if they lent money to Greece.
With Greece on a path towards bankruptcy in early 2010 — and the threat of a new financial crisis looming — the country got its first of two international bailouts that would end up totaling 240 billion euros ($268.8 billion in U.S. dollars at current exchange rates) from the so-called "troika" — the European Central Bank , the International Monetary Fund and the European Commission. The bulk of the money Athens owes today is to the troika, and not to European banks.
Why hasn't Greece paid the troika back?
The bailout terms were stringent. The "austerity" plan meant less spending, higher taxes, a crackdown on tax evasion and other measures designed to get Greece's finances back on track. But Greece still couldn't come up with the funds to pay its bills on its own.
As a result, Greece's financial situation worsened. Its unemployment rate is above 25% and its GDP has fallen by roughly 30% since 2008, according to World Bank data. Greece's debt is nearing 200% of GDP.
"(Greece) never made policy changes," says Kotok. "They kept doing business as usual."
The bottom line: most of the bailout money Greece receives is used to repay loans from its creditors. And it is virtually impossible for Greece to pay down its enormous debt when the economy is underperforming.
What happens if Greece doesn't pay back the loans?
If Greece defaults, its economy will contract further and jobs will be harder to come by. Uncertainty about the future will skyrocket. Greek depositors will have trouble getting their money out of banks. Government services will become scarce. And voters could find themselves going to the polls to elect new leaders.
It would also mark the first major advanced economy to renege on a payment to the IMF. Usually, the IMF affords a 30-day grace period before it declares technical default, although IMF Managing Director Christine Lagarde has said Greece will get no such grace period.
A default would also likely mean that the ECB would cut off its emergency cash infusions to Greek banks. That could result in runs on Greek banks (depositors have been yanking cash out of banks there for weeks). Capital controls, or restrictions placed on how much cash depositors can access from their accounts, are also likely.
"Greece won't get a loan at palatable terms, forcing immediate and severe adjustments," says Axel Merk, chief investment officer at Merk Investments. "In addition, Greek banks are likely to collapse, crippling what's left of the economy. Beyond that, it's all speculation."
Greece will likely issue its own currency, too, Merk adds, but it doesn't mean people will accept it.
Financial markets will probably react negatively, although it's unclear on how big the negative fallout will be. Investors will quickly try to determine if a Greek default leads to financial contagion, or spreads to other markets around the globe. Currently, the consensus is that Greece does not pose a "systemic" risk to the system.
What's at stake for the European economy?
Opinions differ to how a default will affect the European economy.
"Not much, this is Greece's problem," says Merk. "Indeed, clarity would be helpful, as one could move forward."
Despite Greek's woes, the eurozone economy is starting to firm up, bolstered in large part by the ECB's government bond-buying program designed to reflate the economy by keeping rates low and bolstering economic activity. The eurozone, a 19-nation economic and currency bloc, has finally climbed out of recession and grew 0.4% in the first quarter of 2015.
Given that Greece's economy is centered mainly around tourism, coupled with the fact that the bulk of its debt is no longer held by European banks and the ECB now has backstop tools if turbulence occurs, a default is not expected to bring the eurozone economy to its knees.
Offering a differing opinion, Kotok counters that there are still many uncertainties related to how markets will react to a Greek default. "The rest of Europe is a big uncertainty," says Kotok. "That is the unknown risk."
What's at stake for Greece?
"Everything," Merk warns. "They can choose between making a tough or a horrible choice. Both are painful."
Greece's role as a member of the 19-nation euro is at stake. There is a chance that it will have to exit from the euro. What's more, if Greece fails to strike a deal for more bailout funds, it is likely that the financial pain and economic challenges will become even greater, creating a great burden on its citizens.
Contributing: Kim Hjelmgaard
Maury Harris, chief economist at UBS, discusses how Greek debt may impact the United States markets and what's different in this round of debt negotiations. Bloomberg