How did this start?
Greece's finances have rarely been a model of good management. The country's government has defaulted on its debt to foreigners at least five times during the past two centuries.
Even before it joined the euro zone in 2001, Greece had built up a national debt that was equal to more than its entire output, or gross domestic product.
Greece's entry into the euro zone aggravated the country's debt problem. Money flooded into the country (as it did in many economies on Europe's periphery), attracted by the seeming stability of a new common currency that could not be devalued. Interest rates fell in response, encouraging a spending boom. Greece's economy grew strongly after 2001 and its debt grew with it.
When the financial crisis hit in 2008, the torrent of money dried up, the economy slammed to a halt, and many of those loans proved unpayable. In 2010 and again in 2012, the euro zone stepped in to arrange bailouts that, among other things, saw private-sector creditors write down the value of their loans to Greece by about 50 per cent. In exchange for the bailout, Greece pledged to reform its economy and clamp down on government spending.
Total government debt % of GDP
This is a partial list of countries, ranked by their 2010 debt as a percentage of of GDP. While these OECD number only go to 2010, other sources peg the Greek gross public debt at 175% for 2013 and 176.3% for 2014 (European Commission).
But, as Greece's economy shrivelled under the weight of financial austerity, the burden of its borrowing became heavier and heavier in comparison to its ability to service it. By 2010, the country's debt was equal to nearly 150 per cent of its GDP, according to the Organization for Economic Co-operation and Development. The debt has since expanded to about 176 per cent of GDP – a level that makes it next to impossible to repay, especially for an economy that is growing only slowly if at all.
So who's to blame?
That is a charged question. Many other euro zone countries have also faced crushing recessions, which suggests that the design of the currency bloc was at least partly at fault.
The essential problem was that euro zone countries with large trade surpluses – read, Germany and the Netherlands – had to find a use for all the capital they were accumulating in the years before the 2008 financial crisis. The obvious place to deploy it was in other euro zone members.
But countries such as the so-called PIIGS (for Portugal, Italy, Ireland, Greece and Spain) didn't have large export-oriented industries that could easily absorb all the new capital and put it to good use. As a result, the tide of cheap money served merely to fuel gigantic housing bubbles in places like Spain and Ireland, or unsustainable booms in consumption.
When the money flow stopped, brutal recessions followed, even in countries like Spain and Ireland that were running budget surpluses before the financial crisis and appeared to be models of fiscal prudence. Both have since endured double-digit unemployment and big cutbacks to government services.
To some degree, Greece is feeling the same pain as its fellow sufferers on Europe's periphery. And to that degree, Greece's problem can be laid at the feet of the euro zone's architects – or, more precisely, at the feet of the German and Dutch banks that directed so much capital into fragile economies.
Ah, so it's all the euro zone's fault then?
Not so fast. There's lot of blame to go round and Greece deserves a heaping helping of it.
In the years leading up to the financial crisis, the country lied about its national accounts. The European Union's statistical office, Eurostat, lambasted Greece for "severe irregularities" in a post-crisis report, saying that political interference had corrupted economic data and hidden the true extent of the country's problems.
The truth only emerged when a new government, under socialist George Papandreou, took office in 2009 and acknowledged that the annual budget deficit would not be 3.7 per cent of GDP, but rather 12.5 per cent.
In the aftermath of that revelation, interest rates on the country's debt jumped and foreign investors fled. The crisis was on.
Got it: This is all about Greece living beyond its means, right?
Yes, but not in the way you might think. Government spending is roughly in line with other European countries as a percentage of the nation's overall economy.
What's not in line are tax collections: Nearly a quarter of economic activity is estimated to take place under the table – and away from the eyes of the taxman.
Greece has been trying to crack down, but there's little evidence that things are improving. "Tax evasion by high-wealth individuals and self-employed remains rampant," according to a report last year from the International Monetary Fund.
Many Greeks feel entitled to stiff the tax collector because they believe the public sector is broken. The country ranks as one of the most corrupt in the European Union, according to Transparency International, a non-profit group dedicated to promoting honesty in government and business. It's common for civil servants to demand payoffs for performing tasks and respondents to a 2011 survey indicated that tax collectors could be bribed for as little as €100, according to the group.
The result is a system where large amounts of revenue go uncollected. That is a problem for Greece, but it's also an emotional issue for taxpayers in other European countries. They aren't eager to pay more in taxes to compensate for the Greek citizens that don't pay theirs.
How much pain is Greece in?
Think of the Great Depression in Canada: That is roughly what Greece is experiencing now, but with the added twist that there is little hope for speedy improvement.
Unemployment stood at 25.8 per cent in October, according to the Greek statistical agency, more than double the euro zone average. Youth unemployment is at 50.6 per cent.
The country's economy has shrunk by a quarter since 2008. However, there are signs that growth is slowly returning. Final figures are expected to show that it eked out a tiny 1-per-cent gain in 2014, and forecasters believe it will expand 2.5 per cent this year.
Modest growth of that magnitude isn't likely to ease the country's unemployment crisis. The European Commission believes the jobless rate will remain at 22 per cent throughout 2016.
How has the world responded to Greece's plight?
One of the first reactions came from credit rating agencies. They downgraded the country's debt in 2009 as fears grew the country would default. That led euro zone countries to approve an initial bailout package in 2010 worth €110-billion. (At today's exchange rates, one euro is worth about $1.41.)
The bailout came with stringent austerity measures, but didn't forestall the panic. In 2012, Greece reached a deal with its private creditors that essentially halved their debt in exchange for further austerity measures. In exchange, it received a further €130-billion bailout from the European Union and the International Monetary Fund.
Greece's austerity measures have been far reaching. They include cuts to public spending and pensions, an end to a previous guarantee of a job for life to government workers, and promises to privatize port operators and electric utilities. The country has also agreed to maintain a primary budget surplus – in other words, a surplus before debt payments – to help prevent it from sliding further into debt.
What has prompted the current showdown?
Much of it comes down to austerity fatigue. Greek voters have had it with stratospheric unemployment, grinding austerity and the humiliation of having to live up to conditions laid down by the "troika" – the popular term for the three-headed combination of European Commission, International Monetary Fund and European Central Bank that is overseeing the country's bailout.
At the heart of the Greek position is the realization that the current system leaves them few ways to regain prosperity. In pre-euro times, the country's currency, the drachma, would have plunged in value during a recession and made Greek goods and services more attractive on international markets. But locked into a common currency, Greece no longer has that option. It can only reboot its economy by chopping wages and prices – a slow, painful process.
In January, the far-left Syriza party gained power in national elections. Headed by Alexis Tsipras, Syriza demanded that the conditions of the bailout be renegotiated.
How's that going?
Slowly, very slowly, the two sides appear to be inching toward an agreement. After two meetings of euro zone finance ministers, Greece appears willing to consider asking for a four-month extension of the current bailout program, which would take it to June. In exchange, Mr. Tsipras seems willing to commit to several principles, such as continuing to run a primary budget surplus and not roll back economic reforms.
What if no agreement is reached?
An excellent question. Greece's government would run out of money in the next few weeks and would probably have to impose capital controls to prevent more money from fleeing its banks.
At that point things become murky. Some commentators, such as John Cochrane, a professor of finance at the University of Chicago, have suggested that Greece could stay in the euro zone – there's no legal mechanism for expelling it – and issue IOUs against its future tax revenue. This would create a parallel currency that would still be tied to the euro but would be free of the European Central Bank.
A more obvious and drastic solution would be for Greece to default on its debt, bid farewell to the euro and re-introduce the drachma. This new currency would probably plunge in value – and that might be good news since it would make Greek goods and services a bargain, spurring exports and delivering a jolt to the economy.
Whatever happens to Greece at that point, the world's faith in the euro would be shaken. The common currency would no longer be regarded as an irreversible arrangement among permanent partners, but as a pact of convenience that other countries could also leave if they find it to their advantage.
For now, markets seem to regard the possibility of "Grexit", or Greek exit from the euro zone, as a remote possibility. European stocks and bonds have demonstrated little tendency to react to the ups and downs of the Greek debt negotiations.
But if talks fall apart, that complacency will be violently shaken. European stocks would fall, bond yields would rise and a sputtering global economy would take another blow.