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Greece's debt problems put Europe, globe on crisis alert

BRUSSELS — European and U.S. stock markets have encountered turbulence recently as investors worry about the debt crisis enveloping Europe, particularly in Greece. • Here are some questions and answers on the Greek debt crisis and its wider significance:

Why is Greece's debt load — estimated at 127 percent of gross domestic product for this year — such a problem?

It has stoked concerns in the markets that it will end up having a full-blown debt crisis. The risk is that it will not be able to get the money it needs to roll over expiring debt and pay off the interest on its rising debt burden, thereby triggering a default.

The principal losers of a default would be those who have exposure to Greece, which includes other countries, as well as banks in Greece and Europe holding Greek bonds. In the current globalized world, markets would zero in on the next weakest link, and it's this threat of contagion that has prompted EU leaders to consider ways to help Greece.

If a much bigger economy, such as Spain, gets into similar difficulties, the global impact would be much greater.

Other countries have large debt loads but no crisis; why?

Japan has debt worth almost 200 percent of its economy, but no one is talking about a potential default. The main reason is that Japan has access to an abundant lending market — its own, the Japanese bond market.

Italy also has a bigger total debt burden, but its current annual borrowing of just above 5 percent of its gross domestic product is much lower than Greece's 13 percent, meaning that it does not need to tap international investors as urgently.

Don't some countries have low debt but a bad economy?

Low debt levels do not necessarily mean that a country has a good economy. After all, one of the reasons the Great Depression of the 1930s happened was the government's obsession to balance budgets. Borrowing can be used to fund capital investments, which should reap returns in the future, and also support economies when times turn sour. When economies recover, these associated social payments for, say, unemployment benefits disappear — helping the budget return to balance.

Support, not cash

European Union leaders faced down markets Thursday with a statement of support for Greece — but offered no detailed bailout for a debt crisis that has plunged the euro into its deepest crisis since it was launched 11 years ago. The 16 countries that use the euro promised to "take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole." But they left out any detail about what they might do to prevent the country from defaulting on its massive debt. EU nations are reluctant to put money on the table for Greece, believing that this would it off the hook for years of economic mismanagement and faked statistics — and might encourage overspending by others who they think they too will be bailed out.

Support, but not cash

European Union leaders faced down markets Thursday with a statement of support for Greece, but offered no detailed bailout for a debt crisis that has plunged the euro into its deepest crisis since it was launched 11 years ago. The 16 countries that use the euro promised to "take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole." But they left out details about what they might do to prevent the country from defaulting on its massive debt. EU nations are reluctant to put money on the table for Greece, believing it would take it off the hook for years of economic mismanagement and faked statistics — and might encourage overspending by others that they think they, too, will be bailed out.

Greece's debt problems put Europe, globe on crisis alert 02/11/10 [Last modified: Thursday, February 11, 2010 9:36pm]
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