Stocks rally on news of possible Greece bailout. What comes next?
Stocks rallied in the US and in Europe on Tuesday on expectations of an emergency European Union bailout for Greece. But Greece, with a ballooning national debt, is not out of the woods yet.
Is the European Union about to put lipstick on a pig?Skip to next paragraph
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No, not the type of pig that can get you into hot water in a US presidential campaign. But one of the PIGS – Portugal, Ireland, Greece and Spain – whose heavy levels of debt, which have proved a drag on the euro in the past year, have earned them that unflattering moniker in European financial markets.
The PIG in question is Greece, which currently has the ugliest financial outlook of any member of the eurozone. The Hellenic Republic's problems have depressed European and other markets since the start of the year, with fears of a possible Greek government default leading to contagion – a felling of financial dominoes as investors panic and defaults in one country trigger problems elsewhere.
Ireland, for instance holds a significant chunk of Greece's debt and is facing financial problems of its own. Greece's debt burden were a key reason the euro fell to a 9-month low earlier this week.
After news agencies reported today that Germany, France, and other European financial heavyweights were considering a package of loan guarantees – a type of bailout – for Greece, US stocks and some European markets rallied. The benchmark Greek stock index rallied five percent.
The country’s debt crisis will top discussions when Prime Minister George Papandreou meets with French President Nicolas Sarkozy on Wednesday, ahead of a European Union Council meeting Thursday that investors hope will agree to a bailout.
While that's cheered up markets, Greece and a number of its peers are not out of the woods yet. They still carry some of the highest debt levels seen in Europe since WWII, as countries grapple with a high unemployment, slow growth, and the cost of government stimulus programs designed to revive their economies.
Below we look at the state of Greece's finances, and what's likely to happen next.
What’s wrong with Greece?
Greece’s deficit reached 12.7 percent of gross domestic product in 2009, and the country’s debt-to-GDP ratio rose to 110 percent. That means that the country's total economic output is worth about $340 billion a year, but its current debt is $375 billion. That’s a higher debt-to-GDP ratio than in any other European country, and it has investors hesitant to continue loaning and worried that Greece will default on its loans.
Can Greece export its way out of trouble?
The IMF has bailed out three EU countries – Hungary, Latvia and Romania – during the financial crisis of the past year or so, but they’re not eurozone nations overseen by the European Central Bank. Finland and Sweden faced similar crises in the early 1990s, but because they weren't using the euro they were able to depreciate their own currencies and export their way back to prosperity. A lower domestic currency made their exports cheaper to consumers in the US.
But as a member of the 16-country eurozone, Greece is subject to the policies of the European Central Bank.