Greece Crisis 101: No way out

This is an archived article and the information in the article may be outdated. Please look at the time stamp on the story to see when it was last updated.

NEW YORK (CNNMoney) — On Sunday, Greece will vote on a landmark referendum: “Yes” or “No” to another bailout and more austerity? In Greek, that’s “Nai” or “Oxi?”

Polls show a contest too close to call. But this much is known: The result could cost Prime Minister Alexis Tsipras his job and force an abrupt change in government. And no matter how it goes down, it won’t solve the urgent crisis facing Greece.

Years of recession and austerity, compounded by failed political brinksmanship, have left Greece dead broke.

Without another rescue, economic calamity is likely: Banks will run out of money, seniors may not get their pensions, and unemployment — already an unimaginably high 25% — will worsen. Here’s how Greece got to this point.

What’s at the root of Greece’s problem?

Debt. Greece has way too much of it. Greece is not a big country. It has about 11 million people and an economy the size of Oregon’s. Tourism represents around 16% of Greece’s economic output.

Greece has so much debt that regular investors stopped buying its bonds — ie. lending it money.

All healthy countries — and even some unhealthy ones — borrow money by selling bonds to investors big and small. The point is to use the money to make the country stronger by doing things like building better transportation and infrastructure and making education better. The U.S. has a lot of debt, but it has a giant economy and can afford to pay it back.

But countries get into trouble when they borrow beyond their means. That’s what happened to Greece.

When did Greece’s debt trouble begin?

There’s a debate about just how deep the roots of Greece’s overspending go. But this much is clear: Like a lot of countries in Europe, Greece wasn’t in a crisis until after the global economy melted down in 2007 and 2008 and financial “contagion” spread all over the world.

As things got worse, governments spent more money. The spending put money in people’s pockets and paid for a safety net for the most vulnerable, but it also added to governments’ debts.

Most countries were able to keep their heads above water. But some European countries nearly drowned. Greece was in the worst spot of all.

When was the first Greek bailout?

2010. Europe’s leaders, along with the International Monetary Fund, gave hundreds of billions of euros to Greece and several other countries so they could pay their debts.

These bailouts involved a tradeoff: The crisis countries got emergency money, and in turn agreed to cut spending and make make their economies more efficient. The austerity was harsh.

Greece was forced to make deep cuts in government salaries, hike taxes, freeze state pensions, and ban early retirement. Many economists warned that austerity would make things worse; others said Greece had no choice.

Sure enough, Greece reduced its new debt, but it hasn’t made progress in paying down its bailout loans or reforming its economy like other countries have. And austerity added to the country’s economic suffering.

This past January, fed up voters elected a party called Syriza that promised to end the austerity. Alexis Tsipras, who led Syriza, became prime minister.

Tsipras knew bailout loans were coming due and that Greece didn’t have enough money to pay them. He needed to negotiate with Europe to roll over the loans into new bailouts.

But Tsipras took a hard line, insisting that the bailout lenders loosen austerity. It was a high-stakes game of chicken. The lenders didn’t blink, and last week Greece defaulted on a loan to the IMF,  becoming the first developed country to do so.

What are Greece’s options now?

There aren’t many. The debt is still there and Greece’s economy has gotten worse this year. The country’s banks are almost out of money.

Because Greece is on the euro — a currency used by 19 countries — it doesn’t set the value of its money. So it can’t turn to an age-old response by countries with too much debt: devaluation. Devaluation means using the levers of finance to make money worth less. When money is devalued, the cost of debt goes down.

Bankruptcy is also not an option for Greece. Companies deep in the red can ask a judge to help them get lenders to accept less than they are owed. There is no bankruptcy court for countries.

The other way a country can get rid of debt is if the economy grows. But Greece owes so much compared to the size of its economy, it would take a miracle for that to work anytime soon.

What’s next?

Nothing good. Sunday’s vote asks Greeks to accept, or reject, yet another bailout with less-severe austerity conditions attached to it.

Tsipras, who called for the referendum, wants people to vote “No.” He thinks that would give him more leverage with Greece’s bailout lenders. Leaders of Tsipras’ political opposition disagree and argue that an “Oxi” vote will only tell the rest of Europe that Greece doesn’t want to be part of the eurozone anymore. The vote could lead to a change in government.

At this point, exiting the eurozone and going back to Greece’s old currency, the drachma, would be very disruptive. The value of the money people have in their pockets (and banks) would decline. Prices would go way up. Life could get even worse.

Meanwhile, there’s still the debt and no money to pay for it. And the ravaged economy.

— Virginia Harrison, Ivana Kottasova, Alanna Petroff and Mark Thompson contributed to this article.

The-CNN-Wire
™ & © 2015 Cable News Network, Inc., a Time Warner Company. All rights reserved.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

1 Comment

  • Reyes

    Excellent web site you have got here.. It’s hard to
    find good quality writing like yours these days.

    I honestly appreciate people like you! Take care!!