What’s going on in Greece?
Greece is defaulting on a key debt owed to the international community—and the Greek government is putting the question of whether the country will default on even more government debt up for a popular vote this week.
How did Greece get into such a financial mess?
Too much debt. For the past twenty years the government of Greece has spent more than it has collected in taxes.
Wait, that can’t be all there is to it. The U.S. does the same thing, doesn’t it?
Yes, but the U.S. is a rich country with a good credit rating while Greece is not.
A good way to measure a country’s debt is to compare it to its GDP. The United States deficit averaged -3.03 percent of GDP from 1948 until 2014, reaching an all time high of 4.60 percent of GDP in 1948 and a record low of -12.10 percent in 2009 (low is bad). Greece averaged -7.19 percent of GDP from 1995 until 2014, reaching an all time high of -3.20 percent of GDP in 1999 and a record low of -15.70 percent of GDP in 2009. In other words, Greece spends about twice as much (as a percentage of its GDP) as does the U.S.
Let’s imagine two countries—Greece and the U.S.—as if they were persons: GDP would be the person’s “income”; the deficit would be “additional credit card debt”; and interest on the deficit would be like “interest on a credit card.”
The U.S. has a high income (16.7 trillion a year) and every year adds about 3 percent to the total it owes the credit card companies (the national debt). No one is too worried that the U.S. will default on its loans so the credit card companies give them a low interest rate (2.43 percent).
Greece, on the other hand, has a relatively modest income (242 billion, or 1/70 the size of U.S GDP) and adds a lot more to its debt every year (7 percent). Greece has a low credit score (i.e., the credit card companies aren’t sure Greece will pay off its debt) and so is charged a high interest rate (about 15 percent).
Now Greece is refusing to pay its creditors, causing financial turmoil throughout Europe.
If Greece is such a small economy why does it really matter if they default?
As the American oil baron J. Paul Getty once said, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” Greece has become the bank’s problem, and the bankers are the banks of the European Union.
By 2010, Greece owed a lot of money to banks in the EU (particularly in Germany and France). If Greece defaulted on its debt, those banks would have suffered substantial losses. So Europe saved their banks by bailing out Greece—on the condition the country would get its act together. It didn’t work. Greece had to be bailed out again in 2012. And the debt crisis has only gotten worse since then.
If this has been a problem since 2010, why has it reached a crisis point now?
This past January Greece elected Alexis Tsipras, a radical leftist and former communist, to be the country’s Prime Minister. After spending the last five months negotiating with the country’s creditors, Tsipras dropped a bomb last Friday: he called for a referendum on July 5 to allow the people to decide whether to continue going along with the bailout proposal. Blindsided, the European banks turned off the money spigot. The people of Greece rushed to get their money out of the banks (what’s known as a “bank run”) causing even more problems for the economy (see next question below).
Also, the Tsipras government said the country would not meet the deadline on a payment of 1.6 billion euros ($1.8 billion) to the International Monetary Fund (I.M.F.). Since no one else would lend Greece money in 2010, the IMF stepped in and gave them a loan. Now that Greece is deciding it’s not going to pay that loan, the international community is outraged.
What did the Greek banks do?
The banks have shut down until after the referendum. Greek citizens can withdraw a maximum of 60 euros per bank card per day or per account per day, and no cash can be moved abroad at all, except for vital commercial transactions that would have to be pre-approved.
Less money in the hands of citizens and businesses means less spending, which hurts the economy even more.
What does all this have to do with the Euro?
The euro is the official currency of the Eurozone, which consists of 19 of the 28 member states of the European Union.
Jean-Claude Juncker, the President of the European Commission, has said that Sunday’s referendum is a vote on whether Greece will stay in the euro. The Greek exit from the Eurozone—sometimes referred to as Grexit—would mean, as the BBC notes, the euro “would no longer be a proper single currency for most of Europe.”
So why does all this matter?
It’s hard to say how much it will matter, or in what ways. The main concern many people have is that a Grexit would show other countries they too can leave the Eurozone when times get tough—and all it may take is a popular referendum. That could put an end to the experiment in which Europe acts as one semi-unified country rather than a continent of individual nations.