Greece’s Debt Crisis Explained

When Greece joined the euro in 2001, confidence in the Greek economy grew and a big economic boom followed. But after the 2008 financial crisis, everything changed. Every country in Europe entered a recession, but because Greece was one of the poorest and most indebted countries, it suffered the most. The unemployment rate reached 28 percent in 2013, worse than the United States suffered during the Great Depression.

If Greece wasn't in the euro, it could have boosted its economy by printing more of its currency, the drachma. This would have lowered the value of the drachma in international markets, making Greek exports more competitive. It would also lower domestic interest rates, encouraging domestic investment and making it easier for Greek debtors to service their debts.

But Greece shares its monetary policy with the rest of Europe. And the German-dominated European Central Bank has given Europe a monetary policy that's about right for Germany, but so tight that it has thrust Greece into a depression.

So Greece is squeezed between a crushing debt burden — 177 percent of GDP, about twice the level in the United States — and a deep depression that makes it difficult to raise the money it needs to make its debt payments.

For the last five years, Greece has been negotiating with European Commission, the European Central Bank, and the International Monetary Fund (dubbed "the Troika") for financial assistance with its debt burden. Since 2010, the Troika has been providing Greece with loans in exchange for tax hikes and spending cuts.

Rich European nations such as Germany believe they're simply insisting that Greece live within its means. But the austere terms of the bailouts have caused resentment among Greeks and contributed to crisis-level unemployment and poverty. In January, they elected a new left-wing prime minister, Alexis Tsipras, who promised to reject the previous bailout deal and secure a more favorable agreement.

But he has very little leverage. In 2010, Greek debt was widely held by private banks, so a Greek default could trigger a financial panic. But since then, this debt has been consolidated in the hands of rich European governments, greatly reducing the risk of a financial crisis if Greece defaults.

So Greece faces a hard choice: it can accept the Troika's demands for further austerity. Or it can defy the Troika, which would likely lead to a default on Greek debt and possibly a Greek exit from the euro. The Greek government is holding a referendum on July 5 to let voters choose between these bad options.

In the meantime, the Greek economy is melting down. Knowing that Greek euro deposits could soon be transformed into devalued drachma deposits, Greek people have been rushing to ATMs to withdraw as much cash as they can. That has forced the Greek government to close the banks and limit withdrawals to €60 per day.