The Associated Press March 4, 2010, 11:35AM ET

Q&A on the Greek debt crisis

Greece's financial crisis has been in the headlines for days. Here are some questions and answers about what caused it and why it affects people outside Greece.

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Q: Why is Greece in trouble anyway?

A: Too much spending and borrowing for too many years and too much of that due in the next few months. A lot of debt is coming due this year -- around euro54 billion ($74 billion) -- and if Greece can't borrow more to pay off those debts on time, the country is in default.

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Q: Why should people in other countries care about Greece's debt crisis?

A: Good question. Most people don't own Greek bonds, so why care if they default? But the rest of the world is affected indirectly in a variety of ways. If Greece became insolvent and the value of its bonds collapsed, European banks that own those bonds would have to take massive write-offs. That would affect lending, still crimped by the worldwide financial crisis and recession.

Economist Joerg Kraemer at Germany's Commerzbank estimates Greece's outstanding securities at euro290 billion ($395 billion), more than twice what Lehman Brothers had before it went under in September 2008 and sent the world financial system into a meltdown.

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Q: Any other consequences of the Greek debt crisis?

A: Plenty. When Greece's troubles appear worse, stocks tend to slide, mainly in Europe but also in Asia and America because market confidence is interconnected. Also, when one country has trouble repaying debt -- be it Greece or Dubai -- investors worldwide tend to freeze up and look more carefully at other governments' finances. So if Greece can't solve its problems, investors could fear the bonds of other countries with shaky finances, such as Portugal, Spain or Italy. That means governments would have to pay more for borrowing, leaving less for social programs, education and roads.

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Q: Why doesn't Greece just sell more bonds to pay off ones coming due?

A: They're trying. But the markets just discovered that Greece has been faking its deficit numbers for years. Would you loan money to someone who had lied about their financial situation? If you did, you would probably demand a higher interest rate -- even if they say they're telling the truth now. That's the situation for Greek Prime Minister George Papandreou.

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Q: Why doesn't the International Monetary Fund bail them out, the way they do other countries that mess up their finances?

A: The European Union opposes IMF involvement for Greece. On paper, Greece can ask the IMF for help and the IMF says it may be willing to do so -- just as it has loaned emergency money to EU members Romania, Latvia and Hungary. But those countries are not part of the 16 nations that use the common euro currency. Many analysts say the EU doesn't want to concede that it can't manage the eurozone on its own. Some say the European Union needs to set up its own bailout fund -- a "Europan Monetary Fund," so to speak -- but so far it hasn't.

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Q: What if Greece really can't pay?

A: Most people think a Greek default would be such a disaster for banks and the euro that the EU will find a way to stop it. There are rules restricting loans to individual countries, but big EU countries like Germany and France could work out something, such as having state-owned banks guarantee Greek bonds so investors would buy them and Greece would get money to pay its debts.

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Q: Why does the euro matter to people outside the eurozone?

A: All this talk about Greek debts has hammered the euro in currency markets, where it has lost over a tenth of its value in recent months. When the euro goes down, other currencies like the dollar get stronger in relative terms. Exports from the United States become more expensive for Europeans, and Europeans exports become cheaper to Americans. If the euro keeps dropping, tourists from outside Europe might find they can afford that trip to Paris now.


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