Why the crisis in Greece matters
Protests have erupted over Greek's financial crisis.
June 16th, 2011
10:10 AM ET

Why the crisis in Greece matters

By Barry Neild for CNN

What's behind the protests in Greece?

A huge financial mess. People are upset because the government has been trying to push through harsh austerity measures designed to help reduce Greece's huge budget deficit. Cuts imposed so far have led to public sector job losses and tax rises.

This has stirred public unrest and created a crisis for Prime Minister George Papandreou, who is scrambling to save his government in the face of political dissent over the terms of a European Union, International Monetary Fund and European Central Bank bailout. Unless a political agreement can be reached, it could block the release of funds agreed under the bailout package.

How bad is the financial situation in Greece?

Bad enough to warrant the initial $145 billion bail out 18 months ago. Now, with the crisis showing no sign of easing, another bail out, potentially worth $170 billion, is in on the cards, but only if European finance ministers can agree on terms.

With the second bail out possibly weeks away, there are widespread fears that Greece will default on debts by the middle of July. Greece's long-term sovereign credit rating was downgraded by Standard & Poor's (S&P) to the brink of default, making it the lowest-rated country in the world.

How does Greece's situation affect the rest of the world?

European markets have suffered losses in reaction to the Greek crisis, with banks that have large exposure to Greek debt - including French leviathans BNP Paribas, Credit Agricole and Societe Generale - taking hits.

There are fears that efforts to restructure Greece's debt could wreak havoc with Europe's banking sector, sparking a re-run of investor panic witnessed in the wake of the 2008 collapse of the Lehman Brothers investment bank.

Greece's woes also reflect badly on the credibility of the euro. A default from Greece is also bound to rekindle fears of possible defaults by other bailed-out euro nations, like Portugal and Ireland, and re-ignite the debate on whether the eurozone can survive.

This could knock the whole bloc into the red, affecting the whole world economy. And if Europe resorts to rescue packages involving bodies such as the IMF, this would further damage the euro's reputation and could lead to a substantial fall against other key currencies, especially the U.S. dollar.

So why does Greece need a second bail out?

The initial package assumed Greece would be able to borrow further loans on the open market, but high lending rates mean this has been impossible.

Is the second bailout package a done deal?

Not yet - the deal could be weeks away. A dispute has emerged between Germany and the rest of Europe over how Greece repays its spiraling debt. Germany wants to see a "soft restructuring" of Greece's loans - a move that would make private investors share the burden - but the European Central Bank has warned any compulsory restructuring could lead to a broader crisis, a view apparently shared by ratings agencies. The political crisis currently engulfing Greece is unlikely to further undermine confidence.

What does the credit rating mean?

The credit rating is an assessment of a country's ability to repay its debts. By cutting Greece's rating by three points from B to triple C, S&P indicates it thinks it may soon have to downgrade Greece to D - or default.

Greek tragedy tops world's debt list

What significance does this have for the bailout?

The S&P rating is likely to overshadow the eurozone discussions about a further bailout for Greece. Meanwhile, the International Monetary Fund has warned it will withhold its share of the original bailout if agreement isn't reached.

What is Greece doing to dig itself out of its hole?

Aside from the controversial austerity measures, the country is also looking to sell off the family silver.

It is looking at an extensive privatization program that could see it unload prized assets including stakes in banks, railways, utility firms, ports and the postal service.

There is also a plan to sell of Hellenikon, Athens' former international airport. Other measures include floating Olympic and tourism property assets on the stock exchange and issuing gaming licenses. The target is to raise about $71 billion by 2015.

How did Greece get into this mess in the first place?

Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. This revealed partly fiddled statistics that showed debt levels and deficits exceeded limits set by the European Central Bank.

CNN's Kevin Voigt contributed to this report.

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Topics: Economy • Europe • Q&A

soundoff (9 Responses)
  1. Abdullah

    Do you think that Kuwait might face the same problem if it wasnt for its oil production?

    June 16, 2011 at 1:25 pm | Reply
    • GOPisGreedOverPeople

      Yes.

      June 17, 2011 at 10:59 am | Reply
  2. j. von hettlingen

    George Papandreou must have the abilities of two Greek mythological heroes – Sisyphus and Heracles – to pull his country through this disaster. Already the negociations with the donors for the bailout are very much a sisyphean task. Furthermore to convince his party and his fellow citizens to understand the precariousness of the situation the country is in and urge them to sacrifice and contribute to the common good are going to exceed Heracles twelve labours.

    June 16, 2011 at 4:51 pm | Reply
  3. Nick Kalargyros

    Why did the Eurozone countries wait until it was too late to look into this issue? The Eurozone knew what they were getting into when they let Greece in the the EU. Sounds to me like a setup for Greece and the other PIG countries to fail so Germany can have the people of these countries working like slaves to pay back the debt the Governments accumulated.

    It is sad, really sad that this is going on in 2011 and making the people of these countries suffer.

    June 18, 2011 at 6:51 pm | Reply
    • Semsem

      Stop blaming the others. Greece LIED to get into the EURO and then LIED again about the huge budget deficits.

      June 19, 2011 at 10:27 am | Reply
  4. Palchy

    Pay attention to Greece – The same is coming to the U.S. over reliance on government = basket case society.

    June 21, 2011 at 1:52 pm | Reply
  5. Rafiq

    what about the USA? What is the difference between the USA and Greece? Both are overspending...

    June 22, 2011 at 10:24 am | Reply
  6. U.S.A

    Your joking me?
    The U.S. is were it is because we are helping others, we spend spend spend for you and get nothing in return! You come to us with help and we do it because it is whats right!

    June 22, 2011 at 11:01 am | Reply

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