From Yahoo News:
"An Idiot’s Guide to the Greek Debt Crisis"
Why is Greece in debt?
Like any state (or person, for that matter) it spent more money than it took in. Traditionally, but especially after switching over to the euro, the Greek government paid out huge amounts of cash it simply did not have. To compound this, the retirement age there is low by modern Western standards, and benefits are generous. Public sector employees are well paid.
Sounds good, right?
The problem is that Greece is also infamous for mass tax evasion. That means severely limited revenue. So when the money ran out, Athens turned to European banks for loans. Soon, the government was borrowing billions and those debts, like subprime mortgages in the United States, were often repackaged and sold off around the Continent. Everyone, especially banks in France and Germany, wanted a piece. Now they have it.
Why does Europe — indeed, the world — care so much about Greece’s debts?
One of the perceived perks when Europe got together on a single currency (Greeks, for instance, gave up the drachma for the euro) was that a strong Europe could prop up an individual state in a time of need. But what’s happened is that Europe itself has become too weak, in the aftermath of the global financial meltdown, to bite the bullet on a country like Greece. A default would shatter otherwise monetarily strong countries like Germany. The Germans, like the Americans, would be left with a host of “too big to fail” banks ready to do just that.
What kind of deal has the EU offered the Greeks?
There have been a few already, and certainly a handful more are in the works, but it boils down to this: European banks will take 50 cents for every dollar owed to them by the Greek government. In exchange, Greece must impose what many have described as a crushing austerity. That means no more early retirement, reduced pay for public workers (the ones who manage to keep their jobs), large-scale cuts to social programs, and a staggered repayment of the reduced debt.
Why did Prime Minister Papandreou originally call for a referendum?
As you might imagine, “austerity” is a dirty word in large parts of Greece. Many people there believe the country is being unfairly affected by reckless spending and subsequent cutbacks by the government. Papandreou, one assumes, didn’t want to be the guy everyone* blamed for taking the EU deal. So he proposed a vote. A referendum. This seriously worried the rest of Europe, as stock markets cratered on fears that Greek voters would spike the bailout. The PM’s decision was scrapped after foreign leaders (and some influential Greek politicians) put pressure on his governing coalition, which might still break any minute now.
Why are the Greeks so reluctant to take the bailout?
Pete Morici, a professor at the Smith School of Business at the University of Maryland and former chief economist at the U.S. International Trade Commission, explained it rather well in his latest column: “[In exchange for] aid from richer EU governments, Greeks must accept draconian austerity measures,” he wrote. “These would further drive up unemployment, and shrink Greece’s economy and tax base at an alarming pace, placing in jeopardy eventual repayment of Athens’ remaining debt. … As currently constituted, a single currency may serve the One Europe designs of France and Germany, but make Greece and the other Mediterranean states nothing more than the victims of a northern conquest.” Greeks who oppose the deal — and even many who support it only as a means of staying a member of the EU — don’t want to end up like an American post-grad, forever in debt to the banks that provided college loans.
What would happen if Greece defaulted on its foreign debt?
The first thing you would notice is a massive drop in stock markets from the U.S. to Japan, and all across Europe. It is extremely important to understand that what happens in Greece will be seen as the way forward for a number of other countries — Spain, Portugal and Ireland, to name a few. Some believe Italy could follow suit. Default by the Greeks would likely mean other sovereign states to follow. Strictly within Greece, it wouldn’t be as bad. Relatively speaking. They would drop the euro and return to the drachma, which would, in turn, be severely devalued. Not great news for Greek tourists planning on a trip abroad anytime soon, but very good news for exports, which would become extremely cheap, like those coming out of China or other, smaller developing markets. Outside of Greece, it would be a big mess. German banks, and maybe French too, would need massive bailouts. The prospect of those defaults in other debt-ridden countries (see above) could cause a run on the banks. Even more money would leave the market. And when money leaves the market, demand drops. When demand drops, economies crater.
What would happens if Greece accepts the EU deal?
Now that Greek PM George Papandreou has called off the referendum on the deal — a vote would have been very close as polls indicate the Greeks are very closely split on the EU proposal — this is the most likely outcome. Greece would see its debt cut in half and be made to enforce the tough austerity discussed before. Expect riots. Banks around Europe would take a “haircut” but remain, for the moment at least, solvent. Greece would pay over time, but most of the money right now would come out of a fund sponsored by the stronger state economies from Europe and the IMF. In short, everyone would relax, safe in the knowledge that the global financial system we’ve all come to know and, well — the system we’ve come to know would keep on spinning for at least another day.
^ I have said it many times before - the EU has expanded way too quickly and now its coming back to haunt them. Not only did the EU allow just any European country to join without really checking their problems, but they did the same with the countries joining the Euro. The EU should never have let Greece (and several other countries - like Italy) to join the Euro. It is clear to anyone with half a brain that when a country's currency (in this case the Drachma) is fixed at 340 Drachma to 1 Euro there is something wrong. It shows that the country involved doesn't have good economic practices and that allowing them into a common currency union will only bring down the common currency and all the countries within - which is exactly what Greece is doing to the EU and the Euro. I think Greece will leave the Euro - despite all the EU leaders saying they won't - and then I see other countries doing the same. The Eurozone is is just like Communism - good on paper, but bad in practice. Hopefully, when countries start leaving the Eurozone it will make travelling over there cheaper for Americans. I would be on the next plane. ^
http://news.yahoo.com/idiot-guide-greek-debt-crisis-163212268.html
