Greece,
the weak link in the euro zone, is inching nearer to defaulting on
its debt. The country has been in a long clash with its European creditors
on the terms of a multibillion-dollar bailout. If the country goes
bankrupt or decides to leave the 19-nation euro zone, the situation could
create instability in the region and echo around the globe. 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. And in
the meantime, the other crisis countries in the euro zone, like Portugal,
Ireland and Spain, have taken steps to overhaul their economies and are much
less vulnerable to market infection than they were a few years ago.
Greece
became the epicentre of Europe’s debt crisis after Wall Street implosion in
2008. With global financial markets still whirling, 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 deviating toward bankruptcy, which threatened to set off a new
financial crisis.
To
avoid 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 levied harsh austerity terms, requiring
deep budget cuts and head-long tax increases. They also required Greece to revamp
its economy by systematize the government, ending tax evasion and making Greece
an easier place to do business.
Sunday’s
referendum will test whether Greek citizens want to stay in the euro zone. New
elections could also be held if Greece’s financial situation worsens. Or Greece
could test the willingness of Russia or China to help should talks with Europe stumble.
