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Questions and answers about the crisis in GreeceQ&A: What the crisis in Greece means for the rest of Europe and the delicate US economy
worker cleans the paint-splattered entrance of the Bank of Greece, as
university students carry their flag after a protest in central Athens
Thursday, Sept. 15, 2011. Greece's cabinet met Thursday to discuss how
to implement a new round of austerity measures despite a surge in
unemployment and a punishing recession, hoping to make sure the
debt-strapped nation keeps receiving rescue loans and staves off a
default. (AP Photo/Petros Giannakouris)
Bernard Condon, AP Business Writer, On Thursday September 15, 2011, 1:47 pm EDT
NEW YORK (AP) -- Its economy is smaller than
that of many U.S. states. It's better known for olive oil and souvlaki
than high finance. It last strode global affairs 2,400 years ago, when
men wore togas.
Yet everyone is suddenly worried about Greece.
have whipsawed on signals that the country will or will not default on
its debt. Economists are adjusting their estimates for economic growth
in Europe and the U.S. based on what happens by the Mediterranean Sea.
fear is that if Greece defaults, it could plunge Europe into recession
and set off a cascade of mistrust and selling akin to what happened
during the financial crisis in 2008.
How likely is that? No one is
sure. Greece says it won't default, and Germany and France have pledged
support. But the news keeps getting worse, and amid the confusion and
uncertainty, investors are frightened.
Here are some questions and answers to cut through the swirl of figures and rumors and, perhaps, better assess the risks:
Q: What's a default?
country is considered in default when it stops paying principal and
interest to its lenders. For Greece, those lenders include European
banks that own its national bonds. If Greece defaults, the banks would
have to absorb big losses. That would make it more difficult for them to
loan money, and that could push Europe, already weak, into a deep
Q: What's being done to make sure it doesn't happen?
Bailouts and more bailouts. Last year, other European nations and the
International Monetary Fund agreed to lend Greece 110 billion euros, or
about $150 billion. A second aid package hammered out in July would help
Greece avoid having to ask jittery bond investors for more money. But
the bailout needs approval from 17 European legislatures, and that is
not assured. German voters, in particular, are wary of sending more
money to their free-spending neighbor.
On Thursday, the European
Central Bank, the U.S. Federal Reserve and three other national central
banks announced they would supply European banks with unlimited
Q: How did Greece get into this mess?
government spent too much, didn't collect enough in taxes and had to
sell lots of bonds to make up the difference. For most of the past
decade, Greece has run up budget deficits well beyond limits set by the
European Union, a group of 27 nations that allow goods and workers to
cross their borders freely.
When Greece fell into recession two
years ago, bondholders worried they wouldn't get their money back. To
make sure they do, the EU is lending money to Greece, essentially
allowing it to use new debt to pay off old debt.
afloat will be tough. Like a loan officer at the bank who checks your
salary and what you owe before deciding how much to lend to you, bond
investors and other lenders to governments like to look at how much a
country makes each year. And Greece looks like a bad bet. Its publicly
held debt is more than 140 percent of its annual economic output, or
gross domestic product. U.S. debt is 67 percent.
Q: What can Greece do about it?
Governments, unlike companies, have an easy way to raise money to pay
their creditors: taxes. Greece announced a temporary property tax
Sunday. Unfortunately, Greece's economy is shrinking faster than
previously estimated, and new taxes won't bring in much more money if
the people and businesses paying them are making less money themselves.
are so nervous about Greek finances that they are demanding more than
100 percent interest to lend money to Greece for one year.
Q: Why should I care if such a small country can't pay its bills?
Greece is a tiny player in Europe. It has a $305 billion economy, about
the size of Maryland's and 2 percent of the whole EU's. And if it does
default, it will have plenty of company. In the past 30 years, 20
European and Latin American countries have stiffed their creditors, some
repeatedly. The list includes Turkey in 1982, Mexico in 1994, Russia in
1998 and Argentina in 2001.
But Greece shares a currency, the
euro, with 16 countries. "It's not just a country floating out there
that happens to default," says Steve H. Hanke, an economist at Johns
Hopkins University. "The whole monetary union gets thrown into doubt."
important: If Greece defaults, investors will worry that two much
larger EU members, Italy and Spain, might follow. And whether a default
happens or not, just the fear of it could lead investors to sell a
country's bonds, which would drive up their yields, or what that country
has to pay to get investors to buy them. Countries need to sell bonds
to finance their budget deficits or to pay off old bonds that are
maturing. If they have to pay higher yields, it just makes the financial
mess they're in worse.
Q: But China, India and Brazil are supposed to be the new economic engines of world growth. Doesn't Europe matter less now?
Those economies may be growing fast, but they're still not as big as
the EU, which together accounts for 20 percent of the world economy.
China, the second largest national economy in the world, accounts for
less than 10 percent.
Q: How does all this affect the United States?
For the U.S., a European recession would come at an especially bad
time. Europe buys about 20 percent of U.S. exports. And exports have
been a big driver of U.S. economic growth recently. With the U.S.
slowing, it can't afford a downturn in such a crucial market.
Q: What about the euro? Does having a common currency help or hurt Greece's chances?
On balance, it's helping. One reason Greece is getting so much help
from its neighbors is that their fates are tied to the euro, too. In
exchange for the first bailout, last year, Greece agreed to spending
cuts and other fiscal reforms. But it hasn't held up its side of the
deal, and it is running out of money again.
But the euro hurts
Greece, too. If Greece still had its old currency, the drachma, it would
be plummeting in value now as investors pulled money out of the
country. But that would also make it easier for Greece to sell goods
abroad because they would cost less for foreigners in their stronger
currencies. A surge in exports would help Greece grow again.
Q: Is fear of a repeat of the global financial crisis in the fall of 2008 making European troubles seem worse than they are?
Maybe. What happened then was frightening, but rare. Like a body
suddenly short of oxygen, the economy suffered because banks stopped
making short-term loans to each other. If banks can't get loans, they
can't lend to companies, and if companies don't have money to do
business, they can't buy supplies or pay workers. International trade
can stop. That's why some people thought not just stocks but capitalism
itself could collapse.
Banks can't just use cash from depositors
to loan out to companies. The deposits are a small fraction of what
banks need to lend.
Three years after the crisis, investors are
worried whether banks can get short-term loans again. U.S. lenders don't
want to give money to European banks, and those banks are wary of
lending to each other, too. So some have had to turn to the European
Central Bank for cash.
"We're talking technical plumbing issues,"
says Johns Hopkins' Hanke. "But beyond that, it's a confidence thing. If
everyone gets afraid, no one will spend."
Q: Aren't banks in better shape than they were during the financial crisis?
Generally, yes. But the threats to American banks keep changing.
Earlier this month, for instance, the U.S. government sued banks for
selling bad mortgage securities to U.S.-controlled housing agencies.
It's unclear how much the banks might have to pay. A hit from Europe
would come at a bad time.
"Our financial system is still very
frail," says Kenneth Rogoff, an economist at Harvard University. Bank
stocks are nearing their levels during the financial crisis. "They're
not in a position to take big losses."
The good news is that U.S.
banks hold much less in Greek government bonds than European banks do.
But the financial crisis showed that danger can lurk in unexpected
places. For instance, banks have sold investors a type of insurance
policy known as a credit default swap that will trigger billions of
dollars of payouts if Greece defaults. They've also used the swaps to
wager billions of dollars more that Ireland, Portugal and Spain will
keep paying their bonds, too.
The use of these swaps has fallen a
lot since the financial crisis, so losses may not amount to much. But in
a complex and interconnected financial system, it's difficult to assess
the bets riding on Europe and who made them. And that uncertainty means
investors are prone to sell first and ask questions later.
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