How the Greek debt standoff got to this point and where it may go

Greece's central bank says the country would face a deep recession if the debt standoff is not resolved

Time is running out for Greece to reach a compromise with its creditors to get more money before risking a default that could plunge the 19-nation euro currency bloc and global markets into crisis.

Greece's bailout package expires on June 30, and without the release of additional funds, officials say, the country won't be able to make a $1.8-billion debt payment owed to the International Monetary Fund this month.

Negotiators had hoped to have an agreement to present to Eurozone finance ministers meeting Thursday that would keep money flowing to Greece's cash-strapped economy. But the talks broke down Sunday, with Greece and its European partners trading blame for the impasse.

European officials led by Germany were demanding that Greece come with new proposals for economic reforms Thursday, something the country said it was not prepared to do until its current plan receives serious consideration. Greek Prime Minister Alexis Tsipras accused creditors this week of "pillaging" his country and said he would wait for them to "adhere to reason."

European officials are openly discussing the possibility that Greece could be forced out of the euro currency, a prospect that until recently they were not willing to entertain.

On Wednesday, Greece's own central bank warned that the country would face a deep recession and dramatic decline in income levels if it failed to reach an agreement with creditors, a course it said would lead ultimately "to the country's exit from the euro area and — most likely — from the European Union."

"A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability," the bank said in its annual report.

European leaders could meet as soon as this weekend to discuss contingency plans.

How did Greece get into this mess?

Greece was forced to seek loans from its European partners when its economy imploded in 2009 because it could no longer borrow on international markets after it became known that the country had been understating its deficit for years.

With markets still reeling from the collapse of Wall Street in 2008, the International Monetary Fund, the European Central Bank and the European Commission in 2010 issued the first of two international bailouts for Greece to avert another financial crisis.

In exchange for loans exceeding $270 billion at today's exchange rate, Greece was required to impose deep budget cuts and steep tax increases along with other reforms aimed at reducing the government's bloated payroll, curbing tax evasion and making the country an easier place to do business. However, Greek officials and many analysts contend that the painful austerity measures have also caused the economy to contract by 25% in the last five years.

Tsipras won election in January on promises to scrap the bailout agreement unless Greece was given a significant reduction in its obligations and the latitude to invest in jobs in a country with the unemployment rate topping 25%. But creditors feared any bending of the rules would encourage other bailout recipients, such as Portugal and Ireland, to demand similar concessions.

With Greece on the verge of bankruptcy, the government struck a deal with European officials in February to extend its repayment program for four months but have failed to reach agreement on the economic reforms needed to release $8 billion in remaining bailout funds.

What are the main stumbling blocks?

The two sides have made progress on fiscal targets, with Greece agreeing to a gradual increase in its primary budget surplus, the amount by which tax revenue exceeds spending after debt interest payments are stripped out. But major differences remain over measures needed to achieve the targets.

Tsipras told lawmakers from his leftist Syriza party Tuesday that creditors were demanding sweeping pension cuts and tax hikes on sensitive items such as medicine and electricity. Creditors say they are open to other ideas but the government has not come up with proposals that they believe are credible. The European Commission's exasperated president, Jean-Claude Juncker, said the debate would be easier if Greek officials did not misrepresent creditors' proposals to their people.

"I am not in favor — and the prime minister knows that — of increasing [sales taxes] on medicine and on electricity," he told reporters.

Is there a danger to other economies?

A Greek exit from the Eurozone would plunge markets into uncertainty about the future of the shared currency that is a central part of the EU vision of the continent as a unified economic powerhouse. But steps have been taken in recent years to improve the region's defenses against market turmoil, and most analysts aren't predicting a major effect on the global economy.

Francisco Torralba, a senior economist at Morningstar Investment Management, said a so-called Grexit was manageable because much of the country's debt is held by institutions such as the IMF and European Central Bank, with only a small portion in the hands of private creditors, most of them with access to support from the European Central Bank."I don't think the markets would have a very strong reaction to a Grexit," he said.

But he cautioned there could be domino effects if investors become more risk-averse toward countries that are considered fragile for reasons that have nothing to do with Greece.

What happens if a compromise isn't reached by the end of June?

Greece won't be declared in default until the IMF's managing director, Christine Lagarde, issues a complaint to the executive board after an allowable grace period. This month, Greece requested a deferral from the fund for a $325-million payment that was bundled into the amount due at the end of June, and fund officials could again take steps to delay the start of default procedures if they believe a deal is possible.

Of more immediate concern, analysts say, is the risk that Greece will miss payments due to the European Central Bank totaling $7.5 billion in July and August.

"If they don't pay the ECB, it becomes a lot harder for the ECB to continue providing liquidity to Greek banks," said Douglas Elliott, an economics scholar at the Brookings Institution, a Washington think tank.

Without continued cash infusions, Greece could eventually be forced to start printing its own money again — most likely the drachma, the domestic currency it abandoned 14 years ago — setting off a new spiral of inflation.

The threat alone could cause a run on Greek banks and a shortage of funds to keep the government operating, forcing the country to impose restrictions on cash withdrawals and transfers.

That may be what has to happen to give officials on both sides the political cover they need to reach a compromise, Elliott said. "I fear we are going to have to have things fall apart before we can pull them together," he said.

But other analysts believe negotiators will find a way to bridge their differences, if only enough to keep the talks going.

"I still think that's the most likely scenario," said Nick Malkoutzis, deputy editor of the Kathimerini English Edition, a Greek daily. "The problem that we have now is there are so many moving parts to this, it's becoming very difficult to ensure that they all fall in place at the right time.... It looks like it's going to be quite an anxious few days ahead."

Twitter: @alexzavis

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