How did Greece get into its debt crisis and what happens next?

With the collapse of negotiations between Greece and international lenders, the Mediterranean country is in danger of a default that could plunge the 19-nation euro currency bloc and global markets into crisis.

Greece is close to bankruptcy, and the bailout packages it has received will expire Tuesday. Without a last-minute deal to keep the country afloat, it will almost certainly fail to make a $1.8-billion payment to the International Monetary Fund that is due the same day.

Greece’s leftist government surprised its European partners Saturday by announcing that it would hold a referendum on their proposals next week and would urge voters to reject them. The other Eurozone nations closed ranks, warning that they would not extend Greece’s current bailout package past its expiration Tuesday.

To prevent another run on euro deposits in Greece’s crippled financial system, a weeklong bank closure began Monday, and residents were limited to about $66 in cash withdrawals from ATMs per day.

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

How did Greece get into this mess?

Greece was forced to seek loans from its European partners when its economy imploded during the recession in 2009. 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.

Greek Prime Minister Alexis Tsipras and his Syriza party won election in January on promises to scrap the bailout agreement unless Athens was given a significant reduction in its obligations and the latitude to invest in jobs in a country with an 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 already on the verge of bankruptcy, the government struck a deal with European officials in February to extend its repayment program for four months. But the two sides have failed to agree on what Greece must do to raise revenue and cut spending if it wants access to the $8.1 billion in remaining rescue loans.

What are the main stumbling blocks to a deal?

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 differences remain over measures needed to achieve the targets.

Tsipras’ government has pledged to protect pensions and public sector wages, proposing to raise more money through higher taxes on the wealthy and big corporations. But European leaders led by Germany worry that would hamper growth and are insisting on more spending cuts.

With the Greek leader accusing creditors of trying to humiliate his country, European officials took the unusual step Sunday of releasing their proposals to show that they had made some concessions and were prepared to address other Greek demands, such as debt relief. But Greek officials say their counterproposals were never seriously considered.

What happens if Greece misses its payment to the IMF on Tuesday?

Greece won’t officially be in default until the IMF issues a declaration to that effect. That could take some time, analysts say.

Greece won’t be eligible for further assistance from the fund until it has taken care of its arrears. However, the bigger issue, analysts say, is whether the European Central Bank, or ECB, is willing to continue providing emergency credit to Greek banks.

Fear of a default has already caused a run on Greek banks in recent weeks, forcing the ECB to make cash infusions to prop up the institutions while the government negotiated with its creditors.

The ECB said Sunday that it would not expand the emergency loan program, raising the possibility that Greek banks could soon run out of cash and the government eventually be forced to start printing its own money again.

Such an event would throw the Greek economy into chaos, as the government rushed to reintroduce the drachma, imposed heavier capital controls and tried to placate angry citizens and businesses whose savings suddenly plummeted in value.

Jean-Claude Juncker, president of the European Commission, urged Greeks on Monday not to “commit suicide” by voting against a deal.

Because Greece’s bailout program expires Tuesday, it is unclear whether the proposals will still be valid when the referendum takes place Sunday. But IMF chief Christine Lagarde told the BBC this weekend that if there was a “resounding yes” to staying in the euro, then the response from negotiators would be “a resounding ‘let us try.’”

Such a vote could give Tsipras the political cover he needs to go back to the negotiating table over the objections of hard-line members of his party, who feel that Greece has already conceded too much. Or it could lead to the collapse of the Greek government.

Is there a danger to other economies?

A Greek exit from the euro would plunge markets into uncertainty about the future of the shared currency, a central component of the European Union’s vision of the continent as a unified economic powerhouse.

The damage to the euro’s credibility as a safe currency could be irreparable. But finance officials are hopeful that they could contain the fallout and keep borrowing costs for other Eurozone countries with heavy debt loads -- such as Italy and Portugal -- from rising to unsustainable levels.

“For all the problems that still exist in the periphery of Europe, none of them are in nearly as bad a shape as Greece. So, I just don’t see that level of contagion effect,” said Douglas Elliott, a fellow in Economic Studies at the Brookings Institution. “And once that becomes clear to markets, I don’t think the rest of the world is going to be impacted that much.”

Analysts say a so-called Grexit can be managed because much of the country’s debt is held by international institutions such as the IMF and European Central Bank, with only a small portion in the hands of private creditors, most of them banks with access to support from the ECB.

“I don’t think the markets would have a strong or very protracted reaction to a Grexit,” said Francisco Torralba, a senior economist at Morningstar Inc.’s investment management division.

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

“I really can’t predict that,” he said.

Times staff writer Henry Chu in London contributed to this report.

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