The Greek saga took another turn last week as the second bailout from the Eurozone countries approved in 2012 expired on June 30, leading to Greece missing a payment to the International Monetary Fund (IMF) and being put in arrears. A referendum asking Greek voters whether they wanted to approve new terms for financial assistance offered by the European creditors subsequently failed, strengthening the hand of the Syriza-led government but also leaving Greece's status in the euro up in the air. The government is putting together another proposal to its creditors to be reviewed later this week.
First, here's how Greece got to this point.
The Greek drama started in late 2009 when the new government headed by George Papandreou revealed that the 2009 deficit would be much larger than previously expected at a time when debt already exceeded the size of the Greek economy. Fears of an inability to afford and service its debt led interest rates to rise, with the ten-year rate doubling from 4.5 percent to 9 percent just between late-2009 and mid-2010.
After receiving several credit rating downgrades, the Greek government enacted austerity measures targeting a deficit of 3 percent of GDP in 2013, down from 15 percent in 2009, in exchange for a 110 billion euro rescue package. The austerity, though, hurt the economy as real GDP shrunk by 5 percent in 2010 and 9 percent in 2011, according to the IMF, and the unemployment rate shot up from 10 percent in late 2009 to over 25 percent by 2012. All the while, interest rates continued to rise dramatically, with the ten-year rate peaking at around 30 percent in early 2012. A second bailout around that time plus a pledge from European Central Bank (ECB) President Mario Draghi to do "whatever it takes" to preserve the euro quelled fiscal concerns for the time being, but Greece's economy remained in terrible shape.
In January of this year, the left-wing party Syriza and party leader Alexis Tsipras won the legislative election and took control of parliament on an anti-austerity platform, creating uncertainty about the path that the new government would take. The second bailout, which was set to expire in February, was extended through the end of June.