The situation in Greece has received a lot of attention lately. What exactly is that situation? In simplest terms, the Greek government might not be able to repay its loans. The country has borrowed close to a quarter trillion euros (“€”) in the last five years from the International Monetary Fund (“IMF”), European Central Bank (“ECB”) and European Union (“EU”). The reason it has borrowed so much is because it has consistently spent more than its revenue for quite a long time.
Greece’s situation had become so dire that for a while it could no longer sell bonds in private markets to finance its deficit spending because credit rating agencies downgraded the sovereign’s debt status to the lowest in the world. The status of such bonds had become “junk,” meaning exorbitant interest rates would be demanded by any bondholders to compensate for high risk. Fortunately for Greece, the IMF, ECB and EU made loans to the country as part of an international bailout. Unfortunately for many citizens of Greece, “austerity” measures were imposed as conditions to the loans. These required the country’s government to reduce its deficit through spending decreases and tax increases, which weren’t viewed favorably by many Greeks who had become too dependent on their government’s largess.
The time has almost come for repayments of a billion and a half €. Some Greek officials have been recently saying they won’t be able to pay even the first of those bills on June 5 without more outside bailout. Despite confidence being expressed by others that a new deal will be struck with the creditors, it is anybody’s guess whether this will happen. If no deal is reached, Greece won’t actually be in default until a payment becomes 30 days late, but by then the European markets might be in turmoil, eventually in a domino manner affecting other parts of the world, including the United States.