Violence erupted on the streets of Athens on Friday during a general strike, and five politicians resigned from Greece's coalition government in protest over the strict austerity measures the country has to introduce before it can get a crucial €130 billion ($170 million) bailout.
Hours after Greece claimed it had reached an agreement among its squabbling party leaders on new cutbacks, European finance ministers Thursday dashed any hopes that the country was close to getting its bailout when they said more austerity needs to be agreed.
Five ministers in the coalition government led by Prime Minister Lucas Papademos resigned Friday over the cutbacks. Papademos, however, insisted the measures will be introduced, warning that "those who oppose austerity cannot remain in government".
Market reaction: Stock markets and the euro fell sharply, with the Athens stock exchange falling 3 percent.
What's next: Saturday sees the second day of strikes and protests against the austerity measures before a key vote in the Greek parliament, which is scheduled for Sunday.
Q: Why is this budget-cutting so important?
A: Without it, the country would not be eligible for a €130 billion ($170 billion) bailout from other countries in Europe and the International Monetary Fund. Greece needs the money before a €14.5 billion bond deadline on March 20 and strike a vital debt-relief deal with bond investors.
Q: And if Greece were to miss this March 20 bond payment, then what?
A: A disorderly Greek default would potentially spread the crisis to other eurozone countries, by making investors even more leery of lending to them. And analysts fear it could set off a chain reaction similar to the financial meltdown that occurred in the fall of 2008 and triggered the Great Recession.
Q: Didn't Greece already get a massive bailout? Why wasn't that enough?
A. Greece has been surviving since May 2010 on a €110 billion bailout. But the terms of that bailout were harsh, requiring higher taxes and deep cuts in public spending. Those actions pushed Greece deeper into recession, and the country's failure to control spending caused its debt burden to rise.
Q: How badly is Greece doing?
Its economy shrank at an annual rate of 5 percent in the third quarter of 2011, the most recent quarter for which data are available. Earlier in the year, it was shrinking at an 8.3 percent rate— about as fast as the U.S. economy was shrinking during the worst of the Great Recession. Thousands of shops and small businesses, vital to the Greek economy, have gone bankrupt. Unemployment stands at 20.9 per cent.
Q: How harsh are the austerity measures?
A: Greece has agreed to a 20 percent cut in its government work force by 2015. A cut of that size in the U.S. would eliminate 4.4 million jobs — half the number lost across the economy during the Great Recession. Greece will also cut the minimum wage by 22 percent. A cut of that size in the U.S. would bring the hourly minimum wage to around $5.80, roughly the level it was at in July 2008.
Q: What are the terms of the debt-relief deal Greece is negotiating?
A: Banks, hedge funds, pension funds and other private investors who own €206 billion in Greek government bonds would exchange them for a payment of €30 billion, plus €70 billion in new bonds. The payment will come from the €130 billion package from Europe and the IMF. The new bonds would have a lower average interest rate and a longer term of maturity.
Q. How will the rest of the €130 billion bailout be used?
A. Greece will invest roughly €40 billion in the country's banks, who would be at risk of collapse from the losses they take on Greek government bonds as part of the debt-relief deal. The remaining €60 billion will be used for financing the country's deficit.
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