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LONDON (AP) — European and U.S. stock markets have taken a hit recently as investors worry about the debt crisis enveloping Europe, particularly in Greece. Here are some questions and answers on the debt crisis.
Q: Why is Greece in financial trouble?
A: The Greek government has spent too much for years. Markets became concerned about this in November after the newly elected Socialist government revealed that last year's budget deficit was more than three times as large as previously estimated. The EU says Greece's financial figures have been fudged for years.
With debt piling up to 113% of the economy, investors fear Greece won't pay its debts, in the form of government bonds — or will need a lifeline from other EU countries to meet its 54 billion euro ($74 billion) borrowing needs this year.
Q: How does that affect stocks and the wider economy?
A: Greece's debt crisis has global implications because it's the most visible example of the massive build-up in public deficits around the world after governments loosened the purse strings to mitigate the global credit crunch.
That means governments have to cut spending, raise taxes and divert revenues to pay off interest on their debts.
Furthermore, because of the worries that Greece may default, investors are demanding higher interest payments before they will lend any more money. The risk premium raises rates on assets, such as corporate bonds — meaning companies themselves find it more expensive to borrow.
Q: What is being done?
A: Greek Prime Minister George Papandreou has proposed deep budget cuts, a freeze on public sector wages, pension reforms, increases in fuel taxes and renewed efforts to rein in the rampant tax evasion in Greece.
The markets, however, are skeptical about the Greek government's ability to deliver, partly because the austerity measures could be met by mounting social and political discontent.
Q: And if that doesn't work?
A: Analysts think if Greece needs a bailout, it will get one. The recently signed Lisbon Treaty specifically allows EU countries to use EU money to bailout a troubled member but does not explain how. The International Monetary Fund says it's ready to help, although EU officials have ruled that out.
Q: Who else is in trouble?
A: Portugal and Spain are now also in the spotlight because their public finances have deteriorated badly during the last couple of years. Italy, Ireland and Belgium are also on the radar, while Britain, which doesn't use the euro but is a member of the European Union, has been warned it may lose its triple A credit rating if it doesn't introduce measures to bring its massive budget deficit down.
Q: What does this tell us about the euro?
A: This is the toughest test for the single euro currency since it was introduced in 11 countries in 1999. It is now used in 16 European nations.
Skeptics of the euro said there would come a time when the European Central Bank's one-size-fits-all interest rate would not work for the eurozone's 16 different countries with 330 million people. They argue that the last thing a country like Spain needs now, with its near 20% unemployment rate, is the government slashing spending to meet the euro's requirements that public debt be no more than 3% of GDP.
Believers in the euro think that countries like Greece are already benefiting just by being in the currency bloc — saving it from a painful currency devaluation.
Most economists think that a break-up of the eurozone is only a remote possibility. But European governments will be under pressure to come up with a better crisis management framework.
| By Bertrand Langlois, AFP/Getty Images |
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