Latest CNN News--Global stocks are slumping on fears Greece will default on its debts and trigger a crisis in the euro, a currency used by 17 European countries. Speculation about a possible default has increased as negotiations around the government's austerity program stutter. Comments filtering down from politicians in Germany, the eurozone's powerhouse, have also indicated it is possible. German economy minister Philipp Rösler, leader of chancellor Angela Merkel's junior coalition partner the Free Democratic Party, wrote in German newspaper Die Welt that the orderly bankruptcy of Greece should no longer be taboo in the debate. Markets have also been shaken by media reports that officials in Germany are working on a plan to protect the nation's banks in case of a Greek default. Further shockwaves are being sent through the financial sector by fears French banks -- which are exposed to Greek debt -- will be downgraded. Friday's resignation of Jurgen Stark, a member of the European Central Bank's executive board, has also raised concerns about divisions within the ECB over a controversial bond buying program the bank restarted this year.
How did we get here? Didn't the rest of Europe have to bail out Greece?
Greece's economy has struggled since the country joined the euro in 2001. Despite last year's €110 billion bail-out ($150 billion) and the introduction of harsh austerity measures, the country has been unable to balance its books. Resistance to the austerity measures and a contracting economy have made it extremely difficult for Greece to clamber its way out of its financial problems, and it has been forced to negotiate a second package of assistance.
Will Greece default on its debts?
Greece is in financial trouble because it is unable to pay back the debts it owes to its international lenders -- and its earnings are lagging. It has been introducing austerity programs, including a property tax announced over the weekend which is to raise €2bn this year, as it seeks to plug its budget shortfalls. Elisabeth Afseth, of Evolution Securities, said the property tax should placate the International Monetary Fund, European Union and ECB -- the parties keeping Greece afloat -- and make it possible to meet the next budget target. However, she added, the next review may be more difficult and that the "patience of fellow Europeans is running increasingly thin." The financial markets are increasingly pricing a Greek default into the cost of its sovereign debt -- but the timing of any default is unclear. While markets are becoming increasingly jittery about a default in the short-term, the political will to keep Greece afloat could put off any default for some years. According to Afseth, Greece is unlikely to recover without a sizeable restructuring of its finances. Structural reforms could save Greece, she continued, but "this requires a bit of a culture change and will take a long time, longer than they can live with the high debt burden." While the structure for the voluntary exchange of bonds is already in place for some Greek debt, "it still leaves Greek debt far from sustainable," Afseth said. Others say a default is highly likely -- but not for some years. Howard Wheeldon, senior strategist at BGC Brokers, said default would not happen in the short term as the euro's strongest members, Germany and France, want to avoid potential political fallout from a default, given each face upcoming elections.
Source: http://edition.cnn.com/2011/BUSINESS/06/21/euro.greece/index.html?hpt=hp_bn1
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