The Greek crisis explained

After three months of haggling and delays, eurozone countries have finally agreed on a multi-billion dollar aid package to help Greece fight its crippling debt and deficit burden.

The bailout is unprecedented in European history, with the total aid package reaching a whopping 110 billion euros (145 billion dollars), 30 billion of which will be provided by loans from the International Monetary Fund (IMF). That leaves 80 billion euros to be paid out by EU member states over the next three years.

In exchange, Greece’s socialist government, led by Prime Minister George Papandreou, will impose harsh austerity measures. These proposed measures have already sparked a wave of public opposition and unrest in the country.

With financial markets still jittery despite the confirmed bailout plan, the EU’s ability to prevent contagion to other countries and hold the eurozone together is now being called into question. FRANCE 24 looks back at the crisis that has rocked Europe’s economic stability.

What sparked the Greek crisis?

In October 2009, the newly elected Greek government sharply revised up the country’s public deficit figures from 6 per cent of GDP to 12.7 per cent, triggering a spectacular loss in market confidence across the globe. Financial ratings agencies downgraded their credit rating for the country, and the Greek government, already struggling to pay back the 300 billion dollar debt left behind by previous administrations, was faced with a sudden rise in the market rate for servicing its massive debts. Although Athens issues bonds in euros, the price of Greek bonds has become higher than for other eurozone countries, reflecting real concern about the possibility of default. In turn, the euro has come under sustained pressure on the world’s money markets.

When was the possibility of a bailout package for Greece first brought up?

In February 2010, European leaders pledged to take “determined” and “coordinated” steps to prevent the possibility of Greek default and guarantee the euro’s stability. But EU finance ministers did not reach an agreement on the main outline of an emergency aid plan until late March. On April 11, EU leaders finally approved a massive European bailout mechanism in addition to IMF loans, which Greece formally submitted a request for on April 23.

Why did it take so long for the bailout plan to be adopted?

The EU’s capacity to take swift and efficient action was sorely tested by the Greek crisis. German Chancellor Angela Merkel long resisted emergency loans, largely because of fierce German public opposition to the bailout before a key election on May 9 in the state of North Rhine-Westphalia. But German reluctance is not solely to blame, and the length and bitterness of the negotiations has shed light on differing national interests within the EU block.

What are the terms and conditions of the aid package?

Athens will receive 110 billion euros (146 billion dollar in loans over the next three years, 30 billion of which are expected to be handed out in 2010). Crucially, the first aid package is due to be delivered before May 19, in time for Athens to make an 8.5 billion euro debt repayment to its major creditors. Eurozone partners and the IMF will effectively cover Greek credit requirements for the next three years at an interest rate of 5 percent per year, which is far lower than the market rate. Greece has until 2014 to bring its deficit to under 3 percent of GDP to meet the criteria of the EU stability pact. The IMF has been charged with checking that Greece meets the strict 3-month targets drawn up in the bailout plan, with Athens facing sanctions if it doesn’t respect these targets.

What austerity measures are demanded of Greece in exchange for international financial aid?

Greek Premier George Papandreou announced two rounds of tough austerity measures, including a rise in the legal retirement age by two years, a public sector pay freeze and a crackdown on tax evasion. End-of-year bonuses for all public sector workers have been cancelled, and retirement pensions reduced by 14%. Greek government spending is set to be slashed by 1 billion euros before 2012. Papandreou also announced a hike in VAT rates from 21 percent to 23 percent, and tax rises on fuel, tobacco, alcohol and property. Yearly bonuses have not been cancelled in the private sector as they were in the public sector but, in counterpart, job security laws forbidding private companies from laying off more than 2% of their employees in one month could be scrapped.

How has the Greek public reacted to these measures?

Predictably, the Greek population is very concerned about the social impact of these measures and there have been warnings of resistance from various sectors of society. Workers nationwide have staged strikes closing airports, government offices, courts and schools. According to the country’s main public sector union, Adedy, the plan will only lead to “a deeper recession and even bankruptcy”. It vowed on Monday to step up its fight against the measures by staging a 48-hour walkout starting on Tuesday, instead of the one-day strike it had planned for Wednesday.