If you only have a minute to try to understand what’s going on in Greece and in the European Union (EU), here’s a summary for you:
The Greek government has accumulated a lot of debt in the past years and is now unable to pay its creditors. Leaders of the EU, the European Central Bank, and the International Monetary Fund (IMF) have been trying in the past weeks to work out a payment plan to prevent Greece from defaulting on its loans. They are also trying to keep Greece from leaving the EU and dumping the Euro currency. However, Greek leaders are not inclined to accept the terms of the proposed payment plan because, for them, the new bailout plan would inflict more harm than good to its citizens. The Greek Prime Minister has instead called for a public referendum on July 5 to let the Greeks decide whether or not to accept the bailout plan.
Now, if you want more details about the Greek debt crisis, scroll down for a comprehensive but easy-to-understand FAQ (Frequently Asked Questions) about the financial chaos currently gripping Greece and the EU.
(Updated July 6, 2015) What happened during the July 5 referendum?
Greeks overwhelmingly rejected the EU version of a rescue plan that would require more austerity programs and belt-tightening measures in Greece. More than 61% of Greek voters voted in a pubic referendum to reject the deal. Prime Minister Alexis Tsipras is said to be now readying Greece’s version of a bailout package that he will present to EU negotiators. Whether this will lead to Greece bolting out of the European Union and abandoning the single Euro currency will certainly be the talk of the town this week.
How did Greece reach such crisis levels?
Greece since the mid-1990s have been, to put it simply, spending more than what it was collecting in tax revenues. Because of these deficits, the country had to resort to external borrowing.
In 2009, the government announced that the deficit for that year was around 13.6% of its Gross Domestic Product (GDP) — a very high deficit percentage. At the same time, it was announced that the previous years’ deficits were actually higher than initially reported. Creditors began wondering if Greece could pay its debts. The country’s borrowing costs rose further as credit rating agencies started downgrading Greece’s sovereign rating.
Wasn’t Greece already bailed out before?
Yes, back in 2010 and in 2012. Much of the government debt are in banks outside Greece, with the majority being held by French and German creditors. France and Germany provided Greece with additional support, together with the IMF, in 2010 and in 2012 but the bailout came with conditions that required structural changes and austerity programs in Greece. (Below is a chart showing the major creditors of Greece’s external debt.)
What were some of the changes made in Greece as part of the bailout plan?
Here are examples of austerity programs and tax measures implemented by Greece in the past years:
- a freeze in the salary increase of all government employees
- a reduction in their overtime pay
- a 10% reduction in their bonuses
- a 7% cut in the salaries of public and private employees
- increased tax on oil and petroleum products
- higher Value Added Tax (VAT) in various industries
In addition, the Greek government:
- privatized several government-owned companies
- increased the retirement age of public sector workers from 61 to 65
- reduced pension payments of its retired citizens
What were the impact of these changes?
The country’s deficit indeed decreased, but many of the reforms did not translate to economic growth. In fact, the Greek economy even contracted which meant its total debt, relative to the size of Greece’s GDP, did not improve. Creditors became more concerned about Greece’s ability to pay.
Greek citizens also lost confidence in the government. And why not? Aside from additional taxes, salary cuts, and pension reductions, the country’s unemployment rate remained above 25%. That means 1 in every 4 Greeks do not have a job.
Hence, in 2015 the public voted for a new government coming from the Syriza coalition, often referred to as a coalition of the radical left. Alexis Tsipras was elected as Prime Minister.
What is the Greek government asking for this time?
For one, the Tsipras-led government wants a write-off (outright forgiveness) on some of its debts. It is also negotiating to remove some of the spending cuts implemented in the past years. In addition, they want to abolish the taxes previously implemented as concession for the bailout plan.
When Prime Minister Tsipras failed to secure these requests during the negotiations last week, he announced that the Greek people would vote on a referendum on July 5 whether Greece would vote Yes to accept the creditors’ latest demands or vote No to reject the offer. The incumbent government is lobbying for a No vote.
What’s the fuss about Greece’s loan to the IMF?
This was recently big news because Greece has a 1.7 trillion euros loan to the IMF which was due and demandable on June 30. When the country failed to make the payment during the deadline, Greece became the first developed country in the world that defaulted on an IMF loan. Loan default has a huge adverse impact to any country because this would make creditors think twice about giving a country loans in the future. The IMF is working with other EU creditors to ensure Greece’s loans to them are paid.
What’s going on in Greece now?
Greek banks will close for at least 6 days starting Monday this week. Citizens have been lining up in ATMs everyday to withdraw their cash, but ATM cardholders are limited to a daily withdrawal amount of 60 euros ($65). The July 5 public referendum, asking Greek citizens whether the country should or should not accept the EU version of the bailout plan, is scheduled to push through.
Will the Greek crisis affect the Philippines?
Analysts say the Greek debt crisis will not have a lot of impact on the Philippines since the latter remains to have good economic fundamentals and there is not much exposure in the said European country. Still, the uncertainty and possible financial contagion in global markets could cause short-term volatility in Philippine markets.
For a detailed analysis of the Greek debt crisis impact, read this PinoyInvestor special report.
Sources: Bloomberg, Yahoo News, CNN
See also: Greek Debt Crisis explained and Impact on Philippines of Greek crisis