A debt crisis in Europe's 17-nation single currency zone has entered a new and critical phase, with fears that Greece could default and spark a global financial disaster like that which followed the collapse of U.S. investment bank Lehman Brothers in 2008.
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Euro zone finance ministers have told Greece it has to approve stricter austerity measures before a final decision is made on the next tranche of EU/IMF loans.
Ahead of a second day of meetings in Luxembourg on Monday, ministers indicated that the 12 billion euros in aid would be paid by mid-July, allowing Athens to avoid default, but said the country had to show progress on plans to cut spending, raise taxes and generate other revenue streams first.
In Athens, anti-austerity demonstrators were gathered in the central square outside parliament, but there were no new clashes with security forces. Power workers began a strike and blackouts were expected in parts of the country.
Greek legislators debated the highly unpopular plans in parliament ahead of a confidence vote due on Tuesday night.
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WHAT'S THE PROBLEM?
Greece has a sovereign debt pile of 340 billion euros ($481.5 billion), more than 30,000 euros per person in a population of 11.3 million. The 110-billion-euro bailout it accepted last year from the European Union and International Monetary Fund has proved insufficient and a second package worth 120 billion euros is now under discussion. With its debt equivalent to 150 percent of annual output, Greece holds two unwanted world records: the lowest credit rating for a sovereign state, and the most expensive debt to insure. Its people have run out of patience with an ever-deepening austerity drive that has slashed public sector wages by a fifth and pensions by a tenth.
WHY DOES IT MATTER OUTSIDE GREECE?
The longer the crisis drags on, the greater the risk that contagion will spread to other troubled euro zone economies like Ireland and Portugal, which have also been bailed out before, and Spain, which is much bigger and would be far more expensive -- perhaps too expensive -- to rescue.
A default by Greece would hammer the banks that hold its debt, including theEuropean Central Bank and big French and German lenders.
It could also prompt credit markets to freeze up, as happened after Lehman's collapse when banks virtually stopped lending to each other.
The White House said on June 16 the Greek crisis was acting as a headwind to the U.S. economy but opinions vary as to the level of exposure of U.S. banks.
A Greek default would be a catastrophe and a humiliation for the European Union, which launched the euro in 1999 as its most ambitious project and a symbol of the continent's unity. It has prompted some commentators to think the unthinkable: that the euro zone might break up, either by the expulsion of Greece or the departure ofGermany, the EU's paymaster, which might be tempted to return to its own currency.
SO WHY NOT JUST BAIL GREECE OUT AGAIN?
The EU's big players -- notably Germany, France and the European Central Bank -- have struggled to work out a rescue mechanism. European governments are keen to avoid a "hard default" as that could threaten banks throughout the euro zone and further afield.
They are therefore discussing a "soft landing" in the form of a debt extension or voluntary rollover by creditors, but some of the proposals have been criticised as default by another name.
WHO ARE THE KEY PLAYERS?
Greek Prime Minister George Papandreou last week reshuffled his government to quell dissent in his ruling Socialist party and gave the finance portfolio to Evangelos Venizelos, a party rival. Venizelos is a political heavyweight who ran the preparations for the 2004 Athens Olympics, but has no economic track record.
At the European level, the single most influential figure is German Chancellor Angela Merkel, as head of the EU's biggest economy. Merkel, who is losing popularity and has suffered a string of 1defeats in state elections, is under intense pressure from a German public that resents footing the bill for what is widely seen as Greek profligacy -- hence her insistence that banks should share some of the pain. Merkel has been accused of holding up the second Greek aid package, further eroding investor confidence which could make the bailout more expensive.
WHAT ABOUT THE GREEK PEOPLE?
Public anger over austerity -- including curbs on widespread early retirement, tax rises and cuts in benefits and wages -- has erupted into frequent strikes and protests, some of them violent.
nemployment is rising. In a poll last month, 80 percent of people said they refused to make any more sacrifices to get more EU/IMF aid. Bank and utility workers, public sector contractors and even doctors have taken to the streets. Private sector workers blame the bloated public sector, civil servants blame tax cheats and many Greeks blame corrupt politicians for the country's problems.
"The big problem of Greek society is the tendency to consider somebody else is responsible for everything that goes wrong," said analyst Theodore Couloumbis.
HOW DID IT COME TO THIS?
Greece, whose economy had grown strongly but suffered problems with corruption and bureaucracy, joined the euro zone a decade ago, linking its economy to other European countries.
It went into recession in 2009 after 15 years of growth and its budget deficit hit 15.4 percent of GDP after a series of revisions by the government which revealed the country's economy was in far worse shape than it had previously admitted.
Chronic problems include rampant tax evasion -- the labour minister has estimated a quarter of the economy pays nothing.
More broadly, the Greek crisis reflects an inherent weakness in the structure of the euro -- a currency zone with a 'one size fits all' interest rate for a set of widely divergent economies, and 17 different countries running their own fiscal policies. How the crisis plays out will determine the failure or survival of the project.