It has been five years since the beginning of the debt crisis in Greece, since then the debt burdened country has not been able to regain full economic stability. After failing to reach an agreement in debt talks on several occasions, Athens once again finds itself on the brink of default and a departure from the eurozone.
What happened in Greece?
The Greek debt saga first emerged in 2008, during the historical outbreak of the global financial crisis which shook both the US and Europe. In 2009, Greece officially announced its budget deficit to exceed 12 percent of gross domestic product (GDP). This caused an uproar amongst investors as Greek bond markets collapsed and the soundness of the Greek economy was now frail. In 2010, Athens was no longer able to borrow from financial markets and credit rating agencies downgraded the country’s sovereign debt to junk status.
At this stage a looming default was hovering over Greece. In order to prevent such a crisis, the International Monetary Fund (IMF) and the European Union (EU) stepped in and agreed to lend Greece 110 billion euros ($146 billion) in loans over three years. In exchange, former Prime Minister George Papandreou agreed to tough austerity measures including budget cuts and tax hikes.
In early 2012, a second package of bailout funds worth 130 billion euros ($172 billion) was released by the EU and IMF. Included in the package was a haircut worth 53.5 percent, for private Greek bondholders. In exchange, Greece had to reduce its debt-to-GDP ratio from 160 percent to 120.5 percent by 2020.
Why didn't the bailout package help Greece?
Although external funding slightly relieved Greece from its financial troubles, it was not enough to diminish economic problems as the funding was directed towards paying off the country’s debt rather than boosting its fragile economy.
As the crisis in Greece continues to grow, several economists and a vast member of the Greek public continue to blame the tough austerity measures for the country’s economic woes.
What do each side want?
Early 2015, the left wing, anti-austerity Syriza party led by current Prime Minister Alexis Tsipras won victory in snap elections and pushed for amendments to the existing bailout package, which consists of 7.2 billion euros remaining in the fund. Despite several attempts, Greece’s international creditors have not agreed to make reforms, instead, both parties agreed to extend the bailout package till June 30.
The main area of disagreement is pension reform. Greece’s international lenders want the cash strapped country to make cuts to its pension system, worth 1 percent of GDP by next year. However, Tsipras has strongly opposed to this request as it goes against his election promise, where he vowed to end the “humanitarian crisis” in Athens. Both parties are also unable to agree on VAT, international lenders want it simplified and raised, and labour market reform.
What will happen next?
On June 22, the Eurogroup called for an emergency summit with the debt-stricken country. If both parties fail to reach a deal, Greece is headed towards a critical deadline on June 30. What makes this deadline so important is that first, Greece’s bailout expires, unless an extension to this deadline is decided, the cash strapped country will no longer have access to the remaining 7.2 billion euros in emergency funds. This would then mean that Greek banks will be cut off from further funding by the European Central Bank (ECB), through Emergency Liquidity Assistance (ELA). Second, the bundled IMF payments of 1.5 billion euros are set to be paid on the 30th. In addition, a payment of close to 6.7 billion euros to the ECB is due in both July and August. However, whether Greece would be able to fulfil these payments remains uncertain.
If Greece isn't quick enough to secure funding, the Syriza government may hold a referendum. Through this, the Greek public will voice whether or not they would like to stay in the eurozone. If a financial earthquake continues to rock the country's stability, another snap election may be held.
What will happen if a Gexit takes place?
The event of a Grexit will have an immediate impact on Greece. The country’s banks will face a wave of capital outflows, euro denominated debts will reach an all time high and its new currency, the drachma, will have very little value. However, some economists believe, in time, an exit from the eurozone will help the country stabilise its economy.
The eurozone, first established in 1999, has strengthened its fragile economy since Greece’s weakest period in 2012. Therefore, analysts say a departure may not strain the 19-nation currency bloc as much as expected. The ECB will also step in to support other vulnerable countries from swift market reactions, however, borrowing costs will increase permanently in the long run.
On the other hand, the Organization for Economic Cooperation and Development (OECD) has warned that a Grexit will weigh down the European economy.
Similarly, US Treasury Secretary Jack Lew stated that an exit from the eurozone will have a major impact on the country’s economy and its people. "It's clear that within Greece the consequence of a failure here would mean a terrible, terrible decline in their economic performance. It will hurt the Greek people, who will bear the first brunt of a failure," he said.