Greece's Debt Crisis

How did Greece get to this point?

The question of how to save Greece, debated for more than five years, is the European Union’s recurring nightmare. If the country goes bankrupt or decides to leave the 19-nation eurozone, the Greek debt crisis could create instability in the region and reverberate around the globe.

A father and daughter at a demonstration in Athens at the end of June. Greek citizens will decide whether to accept the terms of a bailou

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Greece’s finance minister, Yanis Varoufakis, said on Thursday that he would resign immediately if Greeks voted yes in a referendum to accept the terms of an international bailout deal for the country.

That came a day after the country’s prime minister, Alexis Tsipras, urged citizens to vote “no” in the referendum, which is scheduled for Sunday. A “no” vote would potentially improve his negotiating position with European officials. European finance ministers, for their part, said after Mr. Tsipras’s address that they will wait to see how Greeks vote before beginning negotiations again.

What will a referendum do?

The country is approaching one of the most important votes in its modern history on Sunday — one that could redefine its place in Europe — yet many people acknowledge they barely have a clue as to what, exactly, they are voting on.

Greeks have been asked to vote yes or no on whether they supported the terms offered by creditors last week — an offer that in effect expired with the existing bailout package on Tuesday night, and that appears to have been supplanted in any case by a counteroffer offer put forward by Mr. Tsipras.

Greece last held a referendum in December 1974, after the collapse of the ruling military junta. Then, the question asked what type of government Greeks would prefer, and the choices were pretty clear — king or republic. Voters picked republic.

Today, critics argue that Mr. Tsipras is distorting democracy by holding a rapid-fire vote in which people lack the time to understand what they are voting for.

What happens next?

That’s the billion-euro question. Sunday’s referendum will test whether Greek citizens want to stay in the eurozone. New elections could also be held if Greece’s financial situation worsens. Or Greece could test the willingness of Russia or China to help should talks with Europe falter.

Some people are now saying that the real deadline for Greece is late July, after all the warnings that a Tuesday deadline with the International Monetary Fund was the make-or-break day.

July is when Greece owes the European Central Bank a 3.5 billion euro payment. If there is no international bailout program in place by that time, and little chance of such a program being in the works, the central bank at that point would probably have to finally take Greek banks off life support.

Did Greece default on its debt?

When borrowers — whether they are countries, companies or individuals — do not pay their debts on time, they are in default. For practical purposes, then, Greece — which on Tuesday failed to make a scheduled debt repayment of about 1.5 billion euros, or $1.7 billion, to the I.M.F. — has defaulted.

The I.M.F., however, does not use term default. It instead places countries that miss their payments in what it calls arrears.

Semantics aside, missing the payment might lead to a situation in which other large Greek debts are classified as being in default.

A default, even when it is not called one, is an event that can have serious repercussions for a country’s economy and relations with other nations. Defaults can upset financial markets, create uncertainty for other lenders, and generally crimp economic activity.

Greece’s G.D.P. and Unemployment Rates in Europe

First quarter 2015 average; *Britain is the three-month average through February.

Source: Eurostat

How does the crisis affect the global financial system?

Europe is a union in which most real decision-making power, particularly on matters involving politically delicate things like money and migrants, rests with 28 national governments, each one beholden to its voters and taxpayers. This tension has grown only more acute since the January 1999 launch of the euro, which now binds 19 nations into a single currency zone watched over by the European Central Bank but leaves budget and tax policy in the hands of each country, an arrangement that some economists believe was doomed from the start. Since Greece’s debt crisis began in 2010, most international banks and foreign investors have sold their Greek bonds and other holdings, so they are no longer vulnerable to what happens in Greece. (Some private investors who subsequently plowed back into Greek bonds, betting on a comeback, regret that decision.)And in the meantime, the other crisis countries in the eurozone, like Portugal, Ireland and Spain, have taken steps to overhaul their economies and are much less vulnerable to market contagion than they were a few years ago.

Debt in the European Union

Gross government debt as a percentage of gross domestic product plotted through the fourth quarter of 2014.

What’s happening at Greece’s banks?

Greek banks are solvent on paper, but lending is practically at a standstill and they are not able to play the role they should in financing the economy.

On Sunday, the European Central Bank capped its emergency credit line for Greek banks at €89 billion. Most if not all of that money has already been used to cover withdrawals by customers, and there is virtually no money available for new loans. Banks have been closed for the week, with the exception of handing out partial pension payments to retirees.

After Cyprus’s banking system collapsed in 2013, it took two years for the Cypriot government to completely remove restrictions on bank transfers. And Cyprus had a eurozone bailout program in place — which Greece, after Tuesday, probably will not.

And if a Greek bank goes bust, it could create havoc in the financial markets, because Greece has not yet put in place European rules for the orderly shutdown of failed banks.

How likely is there to be a ‘Grexit’?At the height of the debt crisis a few years ago, many experts worried that Greece’s problems would spill over to the rest of the world. If Greece defaulted on its debt and exited the eurozone, they argued, it might create global financial shocks bigger than the collapse of Lehman Brothers did.Now, however, some people believe that if Greece were to leave the currency union, known as a “Grexit,” it wouldn’t be such a catastrophe. Europe has put up safeguards to limit the so-called financial contagion, in an effort to keep the problems from spreading to other countries. Greece, just a tiny part of the eurozone economy, could regain financial autonomy by leaving, these people contend — and the eurozone would actually be better off without a country that seems to constantly need its neighbors’ support.Others say that’s too simplistic a view. Despite the frustration of endless negotiations, European political leaders see a united Europe as an imperative. At the same time, they still haven’t fixed some of the biggest shortcomings of the eurozone’s structure by creating a more federal-style system of transferring money as needed among members — the way the United States does among its various states.Exiting the euro currency union and the European Union would also involve a legal minefield that no country has yet ventured to cross. There are also no provisions for departure, voluntary or forced, from the euro currency union.Investors may also still be betting that Greece will reach a deal with creditors before or after the referendum, particularly because polls indicate the majority of Greeks favor sticking with the euro.

How did Greece get to this point?

Greece became the epicenter of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances.Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.To avert calamity, the so-called troika — the International Monetary Fund, the European Central Bank and the European Commission — issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at today’s exchange rates.The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.If 

Greece has received billions in bailouts, why is there still a crisis?

The money was supposed to buy Greece time to stabilize its finances and quell market fears that the euro union itself could break up. While it has helped, Greece’s economic problems haven’t gone away. The economy has shrunk by a quarter in five years, and unemployment is above 25 percent.The bailout money mainly goes toward paying off Greece’s international loans, rather than making its way into the economy. And the government still has a staggering debt load that it cannot begin to pay down unless a recovery takes hold.Many economists, and many Greeks, blame the austerity measures for much of the country’s continuing problems. The leftist Syriza party rode to power this year promising to renegotiate the bailout; Mr. Tsipras said that austerity had created a “humanitarian crisis” in Greece.But the country’s exasperated creditors, especially Germany, blame Athens for failing to conduct the economic overhauls required under its bailout agreement. They don’t want to change the rules for Greece.As the debate rages, the only thing everyone agrees on is that Greece is yet again running out of money — and fast.