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Q&A: Greek debt crisis Q&A: Greek debt crisis
(2 months later)

What went wrong in Greece?

Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.
Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.
The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.
Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.
There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes.
The EU and IMF have agreed 229bn euros of rescue loans for Greece plus a 50% cut in its debts. PM George Papandreou quit in November after trying to call a referendum on the latest deal.
Eurozone leaders are worried that if Greece were to default, and even leave the euro, it would cause a major financial crisis that could spread to much bigger economies such as Italy and Spain.
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What went wrong in Greece?

Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.
Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.
The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.
Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.
There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes.
The EU, IMF and European Central Bank agreed 229bn euros ($300bn; £190bn) of rescue loans for Greece. Prime Minister George Papandreou quit in November 2011 after trying to call a referendum.
Eurozone leaders are worried that if Greece were to default, and even leave the euro, it would cause a major financial crisis that could spread to much bigger economies such as Italy and Spain.
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Under Prime Minister Lucas Papademos, Greece is trying to negotiate a big write-off of private debts and secure a second bail-out of 130bn euros ($170bn, £80bn) before a 20 March deadline.
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Former European Central Bank vice-president Lucas Papademos has been named as Greece's interim prime minister, following days of negotiations. Greek politicians have reached a deal on austerity measures needed for a new bailout, officials say.
He will head an interim government being formed to make sure the debt-strapped country gets its latest bailout payment. The news came after Prime Minister Lucas Papademos held days of talks with three party leaders from within his coalition cabinet in an attempt to broker an agreement.
His administration will also have to approve a new 130bn-euro ($177bn; £111bn) international rescue package from the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF). The austerity measures have been demanded by the EU, the International Monetary Fund (IMF) and the European Central Bank (ECB) - the so-called Troika - as a condition for handing over a further loan.
The three-point plan includes expanding the single currency's bailout fund to 1tn euros, banks being forced to raise more capital to protect themselves against losses resulting from any future defaults, and banks accepting a loss of 50% on money they have lent Greece. The deal would unlock the latest 130bn euros (£108bn; $171bn) in bailout loans and would allow a further 100bn-euro write-off of the country's debt to private banks.
Greece and its huge debts have weighed on the eurozone for more than a year. Athens faces loan repayments to private lenders of 14.4bn euros on 20 March which it cannot afford to pay and it has failed to cut its deficit.
The country has been bailed out twice - and investors still fear a default. What's in the austerity package?
European leaders are sceptical of Greece's ability to implement spending cuts, so in this latest round, they have been demanding measures that can be implemented quickly and simply.
Greece was told to agree to further cuts in government spending equal to 1.5% of GDP, cuts in pensions and thousands more civil service job cuts.
But this time, the Troika also wants Greece to act to make its economy more competitive, principally by cutting the cost of doing business in Greece.
The government was told to make its labour markets more flexible, to dramatically cut the minimum wage and to scrap a habit of paying a "holiday bonus" equal to one or two months' extra pay.
It was also told to re-capitalise its banks, while ensuring they maintain their managerial independence.
The reforms to pensions proved the most difficult to stomach, but the government now says a compromise has been reached.
Hadn't Greece already implemented austerity measures?
Greece had already previously agreed to far-reaching austerity measures.
Taxes will increase by 3.38bn euros in 2013, following a 2.32bn euro increase in 2011.
The increase includes a solidarity levy of between 1% and 5%, a cut in the tax-free threshold, a rise in VAT rates, and luxury taxes on yachts, pools and cars.
In the public sector, pay will be cut and many bonuses scrapped.
Some 30,000 public sector workers are to be suspended, wage bargaining will be suspended, and monthly pensions of above 1,000 euros cut by 20%.
What is being offered?
The Greek government is being offered two things - a loan and a debt write-off.
Despite the austerity measures taken so far, the Greek government still spends more than it earns in taxes.
The markets don't trust the Greek government to pay back on the money it borrows, so instead, the country has to borrow from the EU and the IMF. In this second bailout, it is being offered 130bn euros to help it meet its obligations.
But a lot of the money Greece is spending is interest and repayments on existing debts. Economists say the sheer level of debt is unsustainable, so private sector banks have offered to write off 50-70% of the money the Greek government owes them.
Greece also now owes money to the European Central Bank which has bought Greek bonds from private lenders. It is unclear whether the ECB will allow Greece to write off any of the debts it holds.
Will it work?
That is the 130bn-euro question. The aim is to cut the Greek government's debt from 160% of GDP to 120% of GDP by 2020.
Some economists and Greek unions say the plan is doomed to fail. They argue that by making people poorer the measures will simply shrink the Greek economy, reducing tax revenues and increasing the deficit.
But EU leaders argue that there is no choice, that spending needs to fall even if it hurts the economy in the short term.
Further they argue that increasing competitiveness, by lowering wages for example, will attract business to Greece and thereby boost the economy and taxes.
What happens if the deal falls through?
Greece would not be able to pay back its lenders and would not have access to funds from the EU.
Banks and bondholders would lose out - but much of the money they would lose has already been written off.
The greater risk may be on the markets where investors may lose confidence in the eurozone's ability to deal with situations where countries are unable to pay their debts.
Whilst much of the debt owed by Greece has been written off, Portugal, the Irish Republic, Italy and Spain also have large deficits and were they to find themselves in similar situations it would be far more serious.
Within Greece, the government would no longer be able to borrow money from anyone and may be unable to pay back its own banks triggering panic and possible bank closures.
Greece could be forced to leave the eurozone and devalue its currency amidst political and economic turmoil.
Why is Greece in trouble?Why is Greece in trouble?
Greece has been living beyond its means since even before it joined the euro, and its rising level of debt has placed a huge strain on the country's economy. Greece has been living beyond its means since even before it joined the euro. After it adopted the euro, public spending soared and public sector wages practically doubled.
The Greek government borrowed heavily and went on something of a spending spree after it adopted the euro. However, while money has flowed out of the government's coffers, its income has been hit by widespread tax evasion.
Public spending soared and public sector wages practically doubled in the past decade. It has more than 340bn euros of debt - for a country of 11 million people, about 31,000 euros per person.
However, whilst money has flowed out of the government's coffers, its income has been hit by widespread tax evasion.
When the global financial downturn hit, Greece was ill-prepared to cope.When the global financial downturn hit, Greece was ill-prepared to cope.
It was given 110bn euros of bailout loans in May 2010 to help it get through the crisis - and then in July 2011, it was earmarked to receive another 109bn euros.It was given 110bn euros of bailout loans in May 2010 to help it get through the crisis - and then in July 2011, it was earmarked to receive another 109bn euros.
But that still was not considered enough. Another summit was called in October in Brussels to solve the crisis once and for all. But that still was not considered enough.
And so, in October 2011, the eurozone got banks to agree to a 50% "haircut" on their Greek holdings, alongside an enhanced 130bn-euro bailout.
Since then, the economic situation in Greece has deteriorated further and the deal now on the table involves an even bigger debt write-off than previously consented to by the banks.
Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full		 Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full
How did we get to this point?
The aim of the original Greece bailout was to contain the crisis.
That did not happen. Both Portugal and the Irish Republic needed a bailout too because of their own debts.
Then Greece needed a second bailout, worth 109bn euros.
In July this year, eurozone leaders proposed a plan that would see private lenders to Greece writing off about 20% of the money they originally lent.
But bond yields continued to rise on Spanish and Italian debt - leading to fears that their huge economies will need to be bailed out too.
The failure of Franco-Belgian lender Dexia also added to woes - French and German banks are large holders of Greek debt.
The eurozone rescue fund - the European Financial Stability Facility - was 440bn euros, nowhere near big enough to deal with that scenario.
And so, in October, the eurozone agreed to expand the EFSF to 1tn euros and got banks to agree to a 50% "haircut" on their Greek holdings.
But then Greece's Prime Minister George Papandreou shocked European leaders by calling a referendum on the bailout package.
That led the leaders of Germany and France, as well as the IMF, to declare that Athens would not receive its next tranche of emergency aid until the referendum had passed.
Moreover, the question of Greece leaving the euro was raised for the first time by angry eurozone leaders.
That forced Mr Papandreou to back down over the referendum, and he has since made way for a new cross-party unity government that is expected finally to pass the latest bailout deal.
Why did the crisis not end with the Greek bailout?Why did the crisis not end with the Greek bailout?
Although Greece's troubles are the most extreme, they highlight problems in the eurozone that also apply to other economies. Although Greece's troubles are the most extreme, they highlight problems in the eurozone that also apply to some other economies.
Many other southern European countries ran up huge debts - government debts as well as household mortgage debts - during the past 10 years. They also enjoyed rapidly rising wage levels.Many other southern European countries ran up huge debts - government debts as well as household mortgage debts - during the past 10 years. They also enjoyed rapidly rising wage levels.
Now the bust has come, it is very hard for them to repay the debts. And the high wage levels leave their economies uncompetitive compared with, for example, Germany.Now the bust has come, it is very hard for them to repay the debts. And the high wage levels leave their economies uncompetitive compared with, for example, Germany.
Because they are inside the euro, these governments cannot rely on their central bank - the ECB - to lend them the money. Nor can they devalue their currencies to regain a competitive edge.Because they are inside the euro, these governments cannot rely on their central bank - the ECB - to lend them the money. Nor can they devalue their currencies to regain a competitive edge.
Meanwhile they are having to push through very painful spending cuts and tax rises to get their borrowing under control. Meanwhile, they are having to push through very painful spending cuts and tax rises to get their borrowing under control.
But this is just pushing their economies into recession, which leads to higher unemployment, and therefore less income tax revenue and more benefit payments for the governments, compounding their financial problems. But some analysts argue this is just pushing their economies into recession, cutting tax revenues.
What would happen if Greece defaulted? In the meantime, EU leaders are struggling to enhance the "firewall", in case any further countries prove unable to repay their debts.
Europe's banks are big holders of Greek debt, with perhaps $50bn-$60bn outstanding. An "orderly" default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. A "disorderly" default could mean much of this debt not being repaid - ever. In October, they agreed that the new European Financial Stability Fund would have up to 1tn euros to guard against future sovereign debt crises. However, the money has yet to be raised. Recently, the IMF said it, too, would have money available.
Either way, it would be extremely painful for banks and bondholders.
What's more, Greek banks are exposed to the sovereign debts of their country. They would need new capital, and it is likely some would need nationalising. A crisis of confidence could spark a run on the banks as people withdrew their money, making the problem worse.
Nonetheless, the Greek economy is only a small part of the eurozone, and the losses should be manageable for its lenders.
The real risk is that a unilateral default by Greece could lead to a financial panic, as investors fear that other, much bigger eurozone countries may ultimately follow Greece's example.
This effect could be even worse if Greece also leaves the euro - something that was explicitly acknowledged as a possibility by the outgoing Greek Prime Minister, George Papandreou, as well as the German and French leaders at the end of October.
Such a move might be a repeat of the collapse of Lehman Brothers, which sparked a global financial crisis that pushed Europe and the US into deep recessions.
What does all this mean to the UK?What does all this mean to the UK?
According to figures from the Bank for International Settlements, UK banks hold a relatively small $3.4bn worth of Greek sovereign debt, compared with banks in Germany, which hold $22.6bn, and France, which hold $15bn.According to figures from the Bank for International Settlements, UK banks hold a relatively small $3.4bn worth of Greek sovereign debt, compared with banks in Germany, which hold $22.6bn, and France, which hold $15bn.
When you add in other forms of Greek debt, such as lending to private banks, those figures rise to $14.6bn for the UK, $34bn for Germany and $56.7bn for France.When you add in other forms of Greek debt, such as lending to private banks, those figures rise to $14.6bn for the UK, $34bn for Germany and $56.7bn for France.
The UK government's direct contribution to any Greek bailout is limited to its participation as an IMF member.The UK government's direct contribution to any Greek bailout is limited to its participation as an IMF member.
However, any knock-on from Greece's troubles would exacerbate the UK's exposure to Irish debt, which is larger.However, any knock-on from Greece's troubles would exacerbate the UK's exposure to Irish debt, which is larger.
And if it led to a major financial crisis, as well as a deep recession in the eurozone - the UK's main trading partner - the damage to the UK economy would be substantial.And if it led to a major financial crisis, as well as a deep recession in the eurozone - the UK's main trading partner - the damage to the UK economy would be substantial.