The euro-zone has been grappling with Greece's financial trouble for more than a year. But after billions worth of loans, recovery prospects are grimmer than ever.
Greece, the poster child of the European malaise, is sinking in a sea of debt and suffering from a grave crisis of governance. So far, the country is presented with two options -- a default on debt obligations, or a European bailout. But both scenarios come with heavy baggage.
The government of Prime Minister George Papandreou survived a crucial confidence vote that will keep it alive and buy it time until the next austerity bill, set to be tabled by the end of the month. But the thousands who protested the decision on the streets of Athens will likely riot again when any new cuts come.
"The political system is rotting … The country is not being governed the way it should be," said Socialist deputy Nikos Salagianis. "A reshuffle will not resolve the country's problems."
Last week, German Chancellor Angela Merkel and French President Nicolas Sarkozy expressed continued support for Athens and called on the European private sector to contribute to the rescue plan -- but did not offer any details on how that will be done.
Questioning that ambiguity leads to the crux of Greece's trouble: the country is billions of dollars in debt. Regardless of whether the government decides to default or not, that money will have to be paid, or lost, by somebody. Austerity measures will be implemented all the same.
Greece has been struggling live up to the terms of austerity measures demanded by its European and IMF creditors who agreed to a 110-billion-euro ($153-billion U.S.) bailout package in May 2010.
Public criticism of the austerity measures reached a boiling point this month, when Papandreou tried to pass through parliament a new program of tax hikes, spending cuts and selloffs of state property. This triggered a rebellion within his own party and angered labour unions and public workers, who took to the streets in violent riots.
In addition to his own party and rioters in the streets, Papandreou also has to hearten worried creditors. Default means any pension fund or bank that lent money to Greece or its private banks will suffer huge losses. The European Central Bank alone owns 49 billion euros worth of Greek bonds. That could be enough to spread the contagion to the rest of Europe, setting off a financial chain reaction that experts say would be catastrophic.
Fears that a messy Greek default may be in the offing has sent the euro down nearly four cents last week below $1.41 U.S. and triggered widespread selling in stock markets.
In the early 2000s, eurozone economy was in its heyday, which led to some lax due diligence in terms of admitting new member states. Italy, Portugal and Greece were somehow allowed to join despite not fulfilling the requirment of having no more than a three per cent budget deficit as a share of the GDP.
It worked fine, for a while. Between 2001 and 2007, Greece's economy grew at a 3.75% annual pace. The government, feeling overconfident, borrowed billions of dollars from the ECB.
Then the devastating recession hit in 2008. When growth slowed, Greece's debt rose to more than 13 per cent of its GDP in 2009.
Essentially, EU membership gave Greece a credit card with a limit that was too high. After the economic crisis hit it could not pay back the debt, which has been piling ever since.
Greeks are now looking for solidarity from other EU members, but bailout policies are becoming an increasingly tough sell in Europe, especially in countries that are doing well, like Germany.
Chancellor Merkel has suffered political setbacks for her sustained support of the bailout policies. Her logic rests on the assumption that defaulting could be much worse, and even more expensive than a bailout. A full-scale restructuring of Greek debt would have "completely uncontrollable" consequences on the financial markets, Merkel said Tuesday.
