Why Is Greece in Debt?

Greece must come up with a loan payment of $1.
8 billion to the International Monetary Fund

by Tuesday, June 30, to avoid a default. Greece and its creditors are still squabbling over a
final deal as the clock ticks, and it is looking increasingly like the Greeks won't make the
payment by tomorrow's deadline. The country is still waiting to for Sunday's referendum,
where the nation will vote to either agree to creditors' terms or say no and risk getting
tossed from the 19-nation euro zone.
Here's 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 on 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.
ATHENS, Greece Here are key dates in Greece's debt crisis, ahead of Friday's last-chance
bid to resolve a bitter feud over Athens' huge EU-IMF bailout and avoid a potential "Grexit"
from the eurozone.
2009
December: The European Union raises the alarm about Greece's public finances. The three
main credit ratings agencies Fitch, Standard & Poor's and Moody's downgrade Greece's
debt.
January 14: The government unveils an austerity plan to put its fiscal house in order and to
restore international credibility.
Under the plan, it promises curbs on public sector hiring and pay, a 10-percent cut in civil
servant benefits and a reduction in military spending, along with 90 percent taxes on bank
bonuses and an overhaul of the fiscal
April 23: With a public debt of 350 billion euros ($435 billion), Greece appeals for aid from
the EU and the International Monetary Fund (IMF) because it can no longer borrow on the
markets.
This leads to the spectre of a Greek default on part of its debt falling due in May and failure
to meet its bills falling due for the rest of the year, with the prospect its woes could be
replicated in other eurozone
May 3: Greece becomes the first eurozone country to receive a bailout as the EU and IMF
announce a 110-billion-euro package in exchange for tough austerity measures, including
harsh wage cuts and tax hikes.
2011
October 27: After Greece's economic situation deteriorates even more, the eurozone
proposes a second bailout package of 130 billion euros, under which private sector creditors
agree to write off 100 billion euros of its debt.
2014
December 8: Eurozone ministers approve a two-month extension to Greece's bailout,
which was set to end December 31, amid an ongoing dispute over budget provisions
between Athens and its EU-IMF creditors.
This gives Athens extra time to fulfill reform commitments.
2015
January 25: Leftist anti-austerity party Syriza, led by Alexis Tsipras, wins Greece's snap
election, on a mandate to renegotiate the unpopular bailout and erase over half the
country's February 12: The government fails to reach a deal with eurozone ministers on
renegotiating the bailout.
Athens proposes to overhaul 30 percent of its reform commitments. It also wants a debt
swap that will free up funds for economic growth, a bridging loan until September to buy
time to hammer out new reforms, and to reverse austerity measures demanded of previous
February 19: Greek authorities send a request for a six-month extension to their EU loan
programme, but austerity-fond Germany rejects the plan.
The coming months: Greece's bailout is due to expire at the end of February and failure to
agree an extension would see Greece default on its giant debts, almost inevitably meaning
that it would crash out of the euro.
On July 20 Greece faces a huge repayment to the ECB of 3.5 billion euros and owes the bank
another 3.2 billion euros on August 20. Rappler.com

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Greece must come up with a loan payment of $1.

8 billion to the International Monetary Fund

What's at stake for the European economy?

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