The Greece crisis

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.

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