How did Greece get to this point?

Greece became the epicenter of Europes debt crisis after Wall Street
imploded in 2008. With global financial markets still reeling, Greece
announced in October 2009 that it had been understating its deficit figures for
years, raising alarms about the soundness of Greek finances.

But the countrys exasperated creditors, especially Germany, blame Athens

for failing to conduct the economic overhauls required under its bailout
agreement. They dont want to change the rules for Greece.
Greeces Creditors

Suddenly, Greece was shut out from borrowing in the financial markets. By
the spring of 2010, it was veering toward bankruptcy, which threatened to set
off a new financial crisis.
To avert 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 todays exchange rates.
The bailouts came with conditions. Lenders imposed harsh austerity terms,
requiring deep budget cuts and steep tax increases. They also required Greece
to overhaul its economy by streamlining the government, ending tax evasion
and making Greece an easier place to do business.
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If Greece has received billions in bailouts, why is there still a crisis?
The money was supposed to buy Greece time to stabilize its finances and
quell market fears that the euro union itself could break up. While it has
helped, Greeces economic problems havent gone away. The economy has
shrunk by a quarter in five years, and unemployment is above 25 percent.
The bailout money mainly goes toward paying off Greeces international
loans, rather than making its way into the economy. And the government still
has a staggering debt load that it cannot begin to pay down unless a recovery
takes hold.
Many economists, and many Greeks, blame the austerity measures for much
of the countrys continuing problems. The leftist Syriza party rode to power
this year promising to renegotiate the bailout; Mr. Tsipras said that austerity
had created a humanitarian crisis in Greece.

Almost two-thirds of Greeces debt, about 200 billion euros, is owed to the
eurozone bailout fund or other eurozone countries. Greece does not have to
make any payments on that debt until 2023. The International Monetary Fund
has proposed extending the grace period until mid-century.
So while Greeces total debt is bigas much as double the countrys annual
economic outputit might not matter much if the government did not need
to make payments for decades to come. By the time the money came due, the
Greek economy could have grown enough that the sum no longer seemed
daunting.

In the short term, though, Greece has a problem making payments due on
loans from the International Monetary Fund and on bonds held by the
European Central Bank. Those obligations amount to more than 24 billion
euros through the middle of 2018, and it is unlikely that either institution
would agree to long delays in repayment.

How Greece and the Eurozone ended up in this

mess, and where they go from here.
Q. How did we get here?
A. Long story. Greeces economy was never strong enough to share a
currency with Germanys, but both sides pretended it was, as it satisfied
Greek pride and Germanys ambitions (suffused with war guilt) of building
an Ever Closer Union in a new, democratic Europe. Reckless lending by
French and German banks allowed the Greeks to finance widening budget
and current account deficits for six years, but private capital flows dried up
sharply after the 2008 crisis, forcing Greece to seek help from Eurozone
governments and the International Monetary Fund in 2010.
Q. But all that was 5 years ago. How has Greece not managed to turn the
corner since then, when every other Eurozone country that took a bailout
has?
A. Greece was the first country to ask for help, and the Eurozone was totally
unprepared for it on all levelspolitical, technological, emotional, whatever.
The IMF, too, had no experience of dealing with a country in a monetary
union. Consequently, the bailout was badly conceived (a point admitted at the
weekend by Dominique Strauss-Kahn, who was head of the IMF at the time),
focusing too much on the budget balance and not enough on fixing Greeces
uniquely dysfunctional state apparatus. In a normal recession, government
spending can offset the negative effects of private demand contracting, but in
this case, the budgetary austerity drove Greece into a vicious spiral. The
economy contracted by 25% between 2010 and 2014, fatally weakening
Greeces ability ever to repay its debts.
Q. But didnt Greece already get a load of debt relief?

A. Yes, 107 billion of it in a 2012 debt restructuring, the biggest in history.

But it was only private creditorsi.e., bondholderswho took the hit. The
Eurozone and IMF refused to write down their claims (although they did
soften the repayment terms), and the new bailout agreement was based on
more assumptions (since exposed as too rose-tinted) that Greece could grow
itself out of its troubles. The economy continued to shrink in absolute terms
and unemployment shot over 25%, forcing an ever bigger burden of taxation
onto fewer and fewer shoulders. That created the political environment for
this years crisis.
Q. You make it sound like this year is different from the previous four
A. Victory for the radical left-wing Syriza party at elections in January
completely changed the political dynamic. Previous governments had come
from the political mainstream, and reluctantly played along with rules
dictated in Brussels and, indirectly, Berlin. Syriza didnt have any truck with
that. It has campaigned for a 50% write-off of its debts and a relaxation of its
budget targets. It has been openly confrontational and reversed key reforms
made by the previous governments, despite promising the creditors in
February that it wouldnt. Syrizas tacticsembodied by Finance Minister
Yanis Varoufakis, an economics professor specializing in Game Theoryhave
been a gamble that the Eurozone would rather make concessions than risk the
economic havoc caused by a Greek exit.
Q. That gamble has failed, hasnt it?
A. As of today, yes. Its Greece, yet again, which is bearing the burden of
everything: the economy had shown signs of bottoming out before Syriza
came to power, with business sentiment at its highest in seven years after a
very good tourist season in 2014. But the brinkmanship has destroyed
confidence, and caused a sharp rise in government arrears and deposit flight,
capped now by capital controls and a week-long closure of the banking
system. Eurozone financial markets arent taking it well, but the prospect of a
shock and awe intervention by the ECB is keeping the sell-off within limits
Monday morning. A real Grexit may yet wreak havoc on the Eurozone too,
but its unlikely that Prime Minister Alexis Tsipras will be around that long to
reap the political rewards.

Q. Arent the creditors to blame too?

Q. How, legally, does Greece leave the Eurozone?

A. For sure, theres plenty of blame to go round. Most people now recognize
that the banks that had lent to Greece pre-crisis should have been forced to
take more losses in 2009/2010. Now the Eurozone has effectively swapped
the private loans for public ones, any debt write-offs have enormous political
costs at home. But governments in Germany and elsewhere have made a rod
for their own back by being so stubborn. When Greece defaults, theyre
going to lose billions anyway, and the cost of their posturing will become
clear to taxpayers who have only been told half the story. They have
squandered a host of opportunities to manage that loss in a more orderly way.
By failing to accommodate more willing (if still inadequate) Greek
governments with debt relief earlier, they prepared the ground for Syrizas
rise.

A. Nobody knows. Like Cortes burning his boats after arriving in Mexico,
the E.U. deliberately chose not to draft rules for that eventuality when it
formed its currency union. There are rules for leaving the E.U., but even
Syriza doesnt want to do that. We will be, as Irish Finance Minister Michael
Noonan said at the weekend, in completely uncharted waters.

Q. What happens next?

At first, the most ambitious attempt ever to create a new multinational

currency all seemed to go so well. The predicted problems with banks and
vending machines never materialized. The euro surpassed the dollar in value.
The launch was hailed as a success.

A. Greece will miss a payment to the IMF Tuesday, and its bailout will expire
the same day. The ECB seems likely to ignore the default at least until the
planned referendum on Sunday, anxious to avoid responsibility for
precipitating the total collapse of the financial system. The creditors are
hoping the Greek government will capitulate under the pressure, and be
replaced by a new government of national unity. Theres no sign of that
happening yet.
Q. But how long can the current situation go on?
A. The banks are closed until July 7, after the referendum. As long as they
still have the lifeline of the ECBs emergency credit facility (over 85
billion), the banks and the government can continue to operate, albeit in a
very restricted fashion. But the government is due to repay 3.5 billion in
debts to the ECB on July 20, and if it cant do that, then the ECB will have to
accept that the Greek state is bankrupt, and cancel that credit line. At that
point, the banks will be insolvent, and it will only be possible to restore their
solvency by re-denominating the rest of their liabilities (i.e. deposits) in a
new Greek currency.

Theyll be damned choppy waters, too.

(CNN)Greece's affair with the euro began with the grandest of hopes. The
country approved the euro in 2001, in time to be among the first countries to
use the new currency.

And yet for Greece, it seems now to have all fallen flat. How did it happen?

Greece adopted the euro

2001: Greece became the 12th -- and last -- country to join the eurozone
before the launch of the euro at the beginning of 2002.
To join, a country had to demonstrate that it had achieved "economic
convergence" with the other eurozone members -- a requirement meant to
ensure that different countries would not jeopardize the common currency.
When Greece was accepted, Finance Minister Yannos Papantoniou described
it as a day that would place Greece firmly at the heart of Europe.
But even then, warnings were sounded. The president of the European
Central Bank, Wim Duisenberg, warned that Greece had much to do in terms
of improving its economy and controlling inflation.

But bogus figures hid the true extent of its deficit

2002: Everyone now agrees that Greece cooked its books.

From there, it spread around the world.

One of the economic convergence requirements was that a country not have a
budget deficit of more than 3% of GDP, or gross domestic product.

And it hit countries around the globe to varying extents. Other European
Union countries were severely affected -- notably Spain and Ireland,
although others suffered as well.

It was a requirement imposed on all countries, but one that has not been
followed over the years by all eurozone countries -- not even that staunch
advocate of strict discipline, Germany itself.

And Greece was hit far harder than many other countries

Yet the extent to which Greece hid its economic problems from its fellow
eurozone members would prove staggering.

2008: But few countries were less prepared to deal with an economic
downturn than Greece. With a yawning gap between revenues and
expenditures, it was vulnerable.

Two years later, a new government came to power

March 2004: In March, the center-right government of Prime Minister
Konstantinos Karamanlis took power. And it took a look at the books.
What it discovered was appalling. The budget deficit was not 1.5%, as
reported, but 8.3% -- five and a half times higher than thought.
The Karamanlis government faced a dilemma: What should it do with this
shocking information?

In 2008, the country's tax collection, such as it was, collapsed. The hole in
the budget grew too big to hide.
Greece needed help.
And the other eurozone countries, fearing contagion -- that, if Greece
defaulted on its debts, other eurozone countries' cost of borrowing would rise
to unsustainable levels -- felt they had no option but to give that help.

International lenders rescued Greece

But as the Olympics approached, it concealed figures

Greece unemployment soared as austerity took its toll.
August 2004: The Olympic Games were approaching -- returning to Greece,
the land of their birth. This was the country's turn to shine on the
international stage.

2010: In 2009, international investors, understandably spooked by the

revelation that Greece's previously announced debt and deficit figures were
inaccurate, became worried about the country's ability to pay its debts.

Well, no need to upset people, inside Greece or out, the government thought.
Instead of revealing the extent of the deficit -- and starting to deal with it -the government covered it up.

The global financial crisis came

2007: The financial crisis had its roots not in Greece, but in the United
States, 5,000 miles away.

The country's credit rating was downgraded, first by Fitch and then by
Moody's.
With investor confidence disappearing, the country's cost of borrowing
spiked and the situation ran the risk of running out of control.
So the other eurozone countries, in the form of the so-called troika -- the
European Commission, the European Central Bank and the International
Monetary Fund -- stepped in to prop up the patient.

Bailout led to layoffs

2015: Still, the budget refused to balance.

2010: In May 2010, leaders of the eurozone and the Greek government
agreed on the conditions for a 110 billion-euro bailout loan. But the bailout
came with strict conditions -- among them that the government had to
improve its tax collection and save money in an effort to bring its budget into
balance.

More money was needed -- and realistically, debt relief as well, if the country
were ever again to stand on its own two feet.
The country was now led by the left-wing government of Alexis Tsipras.
Relations between representatives of the international lenders and Tsipras and
his finance minister, Yanis Varoufakis, were poor -- hampering negotiations.

Saving government money, though, meant laying off government workers.

And that meant that those workers had less to spend, so other businesses
suffered and laid of workers, too.

In June, the negotiations broke off, with each side apparently daring the other
to be the cause of a Greek exit from the eurozone.

Unemployment rose, depressing government tax revenues.

Greece crisis 101: What's going on?

Borrowing new money to pay old debts

That led to the current crisis

2010-2012 Protests grew. The country tossed out the government of social
democratic Prime Minister George Papandreou and ran through two
provisional Prime Ministers -- all in 2011 -- before turning to the
conservative party of Antonis Samaras.

At the end of June, Greece defaulted on a repayment to the International

Monetary Fund.

But still, the bailout medicine didn't do the trick. In February 2012, the
government accepted another bailout loan, bringing the total borrowed to 246
billion euros. A new austerity plan was agreed upon as well.
The amount owed to the international lenders was now 135% of the country's
GDP.
And things were just getting worse.

The banks started to run out of money. Capital controls were introduced,
limiting the amount of money people could withdraw each day.
And now, after weeks of brinksmanship, including the rupture of negotiations
and the holding of a referendum -- in which the Greek people apparently
voted "No" to more austerity -- a deal to lend the country more money and
cancel some of its past debt is needed soon to avoid having the country fall
out of the euro.
That would have unknown repercussions -- for Greece, the eurozone and the
global economy.

Unemployment rose to near 30%. Youth unemployment soared over 50%.

Varoufakis has resigned, saying he was an impediment to negotiations.
What Greek crisis means for you

But the country ran out of money again

Both Greece and its creditors have pledged to renew talks, as they have so
many times before.