ATHENS, Greece – Greece is holding an emergency meeting with its financial rescue creditors in the hope of getting more loans. Without a deal, it could default on its debts as soon as next week, which could be the first step in a chain reaction that sees the country fall out of the euro currency union.
Here is a broad look at the key issues in the crisis.
The Greek government must make a 1.6 billion euro ($1.8 billion) loan payment to the International Monetary Fund this month. It doesn't have the money. It is negotiating with other eurozone countries and the IMF to get 7.2 billion euros in loans — the last installment in a bailout package expiring this month. Without that money, Greece will likely default on the IMF loan. Even bigger payments come due later this summer. Its creditors are demanding that Greece make reforms and cuts, including to public pensions, before releasing the money.
NO BOND MARKET
Greece needs loans because it cannot borrow on bond markets at affordable rates, as other countries do to finance their spending. Greece's bond rates — effectively what international investors demand in return for lending the country money — spiked higher in late 2009 when Greece revealed that its public deficit was far higher than expected.
Greece is having trouble reaching a deal with creditors because a new government, elected in January, says it will not abide by the terms that previous governments have accepted for years. Those terms include cuts to pensions, wages and public sector jobs as well as higher taxes.
Such budget 'austerity' measures aim to reduce the budget deficit but have also hurt the economy by increasing unemployment, making Greeks poorer and reducing the amount of disposable income Greeks have.
The current government, led by the radical left Syriza party, says it will not make more such measures. Creditors are insisting it should if it wants more loans, because they are worried that if Greece doesn't get its public finances back in shape, they'll never get their money back.
The risks of default are that it could unsettle confidence among Greeks and cause bank runs. The banks are currently supported with emergency credit allowed by the European Central Bank. If Greece can't pay its creditors, the government debt lenders use as collateral for their ECB loans would become worthless and the ECB could withdraw its support.
Greece would have to then support the banks itself — but it doesn't have the money to do so. It would theoretically then have to start printing its own money to get cash flowing through the economy again. Doing so, it would effectively be leaving the euro.
Greece's problems will not be solved forever with those 7.2 billion euros. The money would only cover its debt repayments for a few months. So Greece and its creditors need to find a longer-term solution.
Because most of Greece's debts consist of bailout loans, the country would be helped if its creditors agreed to make the terms of those loans easier — either by reducing the interest Greece has to pay on them or extending their repayment date.
Creditors had promised last year to consider this. But they say a decision can be taken only after Greece has fulfilled the reforms demanded in exchange for the 7.2 billion euros in loans. Greece wants such a decision on lightening its debt terms now.