Europe’s Greek drama continues to play out as Greece and eurozone finance ministers attempt to reach agreement over the country’s debt program. The negotiations ended in a standoff Monday, and the lack of a consensus means Greece is at risk of going bankrupt as its bailout package expires in 10 days. The tense deliberations are igniting concerns about a possible Greek exit from the eurozone.
Following Monday’s meeting, eurozone finance ministers gave Athens 48 hours to request an extension to the bailout program that expires Feb. 28, a demand that Greece refuses to accept.
Here are the four most important things to know about Greece’s predicament.
1. How Did Greece Get To This Point?
Greece's credit rating was downgraded by Standard & Poor's in 2009 amid fears the government would default on its debt, which later led former Prime Minister George Papandreou to announce $6.5 billion in austerity measures in 2010, including public spending cuts, public sector pay cuts and gas hikes.
Then in May 2010, fears escalated of a possible default on Greece's debts, prompting eurozone officials to approve a $150 billion rescue package for the country. But as part of the bailout deal, Papandreou was forced to institute a round of austerity measures, including tax hikes, in order to receive a bailout package. The stringent moves since then have sparked public outcry and mass protests.
The unemployment rate in Greece hit a record high of 28 percent in November 2013 and slipped slightly down to 25 percent in November 2014, according to the National Statistical Service of Greece. The unemployment rate in Greece hovered around 12 percent before the country received its first bailout in May 2010.
2. Why Is Greece Renegotiating?
Greece wants to renegotiate the terms of its now $270 billion bailout program after the far-left Syriza Party won elections last month. Before the national elections, the Syriza Party, led by Alexis Tsipras (now the prime minister), staged a revolt against the budget cuts and other austerity measures under the bailout arranged by the European Commission, European Central Bank and International Monetary Fund (known as “the troika”). Greece's previous conservative government had agreed to those bailout terms.
3. Could Greece Leave The Eurozone?
Tsipras’ determination is leading many to ponder what might happen if Greece were to part ways with the rest of Europe. There are some advantages for Greece if it leaves the eurozone. An exit would allow the country the freedom to devalue a new currency to make foreign trade more attractive, according to the Brookings Institution.
But as soon as it became likely that Greece would quit the euro, Greek citizens would try to convert their holdings into secure assets in another European Union member country, says Gary Burtless, senior fellow for the Brookings Institution. “If there's some way that Greek citizens can protect their assets, they're going to do it because the world in which Greece has withdrawn from the euro is unknown, and certainly the banking system would collapse very quickly," said Burtless.
The crisis comes at an interesting moment for Greece as it’s actually at a point of recovery, and economists expect pulling out of the euro would almost certainly throw Greece at least temporarily back into a severe recession, says Burtless. In the short term, euro member nations would be skeptical about the future value of the euro, given the fact that one highly indebted country has withdrawn from the monetary union, which could lead to possible exits by Portugal, Spain or Italy.
4. What’s Likely To Happen?
The European Central Bank already has announced it will provide emergency liquidity to Greek banks of as much as 60 billion euros ($68.5 billion), meaning Greece may not be forced to get a formal extension from the troika when the current deadline expires. The option isn’t permanent, but it could be a good one for Greece if it doesn’t reach a formal extension or renegotiation pact this month.
“After a few years of horrific economic results and economic crisis, Greece is now starting to see its unemployment rate come down significantly, even though it’s coming down from high levels,” said Bert Colijn, senior economist at research group The Conference Board. “But any prolonged situation now of negotiations and uncertainty and even an exit would result in quite dramatic short-term economic results. You can be certain that will result in another massive recession.”