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Greek presidental Evzoni guards stand atop the Acropolis archaeological site in Athens recently. (LOUISA GOULIAMAKI/AFP/Getty Images/LOUISA GOULIAMAKI/AFP/Getty Images)
Greek presidental Evzoni guards stand atop the Acropolis archaeological site in Athens recently. (LOUISA GOULIAMAKI/AFP/Getty Images/LOUISA GOULIAMAKI/AFP/Getty Images)

Understanding the European debt crisis Add to ...

Why is Greece in turmoil?

Greek citizens are furious about the austerity measures the government has put in place to try to trim that county’s huge and unmanageable debts. Government wages have been cut, jobs eliminated, pensions trimmed and taxes raised. The government must make even deeper cuts in order to qualify for more emergency loans from the International Monetary Fund and other European countries. In essence, Greece doesn’t have enough money to pay its bills. Without help it could default on its loans, making it the first Western European country to do so in more than 60 years.

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What are the origins of the European debt crisis?

Greece and several other European countries have been living beyond their means. They have built up huge sovereign debts, partly to finance stimulus to try to get their economies moving again after the 2008-2009 recession. But the debt problems go back much further. Economists say many countries such as Greece have been overspending for years, or even decades. Worries over debt repayment have prompted lenders to become more conservative, raising interest rates and making borrowing more expensive for those countries that already have crippling debt – creating a spiral that is hard to stop.

How could it spread?

If Greece defaults, the banks it owes money to could teeter, or even topple. Greek, German and French banks hold the most Greek government debt and would be under the most pressure. And Greece isn’t the only problem country. There are concerns over high debt levels in Spain, Belgium and even Italy – the third largest economy in the euro zone. The problem is exacerbated by the fact that so many European nations share the euro, putting pressure on the healthy countries in the euro zone to prop up the weaker ones. Troubled countries cannot boost their exports by cutting the value of their currency – a move that might have been possible if they didn’t share the euro with all the others.

How much is it going to cost to fix the crisis?

The Europeans have already proposed a rescue fund of €440-billion, to come from the IMF, wealthier euro zone countries, and the European Central Bank. It would be used to bail out countries or recapitalize banks. But that could rise to as much as €2-trillion, the level some economists say will be needed to restore confidence that Europe can handle the crisis. Numbers of that magnitude will put a strain on everyone involved, particularly the countries that have to come up with the bulk of the funds.

What is the worst-case scenario?

If Greece, or another European country, defaults, it could trigger a domino effect of bank failures (those to whom Greece owes money) and possibly prompt others to default. It would likely freeze credit markets, where everyone becomes afraid to lend to everyone else. That’s the kind of credit crunch that plunged the world into recession in 2008 after investment bank Lehman Bros. collapsed.

Why is this important for Canada?

Canadian banks have little direct exposure to Greece, but they do have links to European banks that could be hurt if the situation deteriorates. And a Greek default or other disaster in Europe would likely plunge the world into a downturn. Canada’s export-led economy would not be immune.

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