Greek debt crisis 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 crisis

Crisis and the UK Growth in graphics Timeline of crisis Austerity plans in full

Eurozone leaders and the International Monetary Fund have agreed to lend Greece a further 109bn euros ($155bn, 96.3bn). The rescue package comes just over a year after Greece received aid worth 110bn euros. The aim is to shore up Greece's economy, calm the financial markets, and stop contagion spreading to other debt-laden European economies. Why is Greece in trouble? Greece has been living beyond its means in recent years, and its rising level of debt has placed a huge strain on the country's economy. The Greek government borrowed heavily and went on something of a spending spree after it adopted the euro. Public spending soared and public sector wages practically doubled in the past decade. However, as the money flowed out of the government's coffers, tax income was hit because of widespread tax evasion. When the global financial downturn hit, Greece was ill-prepared to cope. It was given 110bn euros of bailout loans to help it get through the crisis - but has now needed another 109bn euros. Why did Greece need another bail out so soon? Greece received its original bailout in May 2010. The reason it had to be bailed out was that it had become too expensive for it to borrow money commercially. It had debts that needed to be paid and as it couldn't afford to borrow money from financial markets to pay them, it turned to the European Union and the International Monetary Fund. The idea was to give Greece time to sort out its economy so that the cost for it to borrow money commercially would come down. But that did not happen. Indeed, the ratings agency S&P recently decided that Greece was the least credit-worthy country it monitors. As a result, Greece has lots of debts that need to be paid, but it cannot afford to borrow commercially and does not have enough money from the first bailout to pay them. Why can't Greece just default on its debts? Actually, there is now a debate over whether Greece has effectively defaulted. Under the deal, private sector investors - that is, the banks and institutions that hold Greek bonds - are being asked to accept a 21% loss on the debt they hold. For many observers, this is tantamount to a "selective" default, the first time it has happened to a eurozone member. Fitch, the ratings agency, has said it will declare Greece in default once private investors swap their Greek debt for longer-term maturities as planned.

The two other main credit rating agencies, Moody's and Standard & Poor's, have downgraded Greek debt and also said the debt swap would constitute a selective default. If Greece were not a member of the eurozone, Athens might certainly be tempted into a wholesale default on its debts, forcing creditors to accept lower interest payments or to write off some of the debt. But eurozone governments desperately want to avoid a comprehensive default. The rates of interest that eurozone governments have to pay have been kept low by the assumption that the European Union and the European Central Bank would provide assistance to eurozone countries to stop them defaulting. If that turned out not to be the case, the cost of borrowing for many of the smaller EU states, some of which are already struggling to service their debts, would rise significantly. It means that if Greece was to default, the Irish Republic and Portugal might have to default as well. It would also be bad news for the banks that have loaned large amounts of money to the indebted governments. So, the reaction of the financial markets to the latest rescue is key. Will they regard it as just a "default" by another name?

Could the crisis spread? The aim of the latest rescue - as with the first bailout - is to contain the crisis. If it fails, then Greece's membership of the eurozone and the survival of the 17-nation bloc will be in doubt. The bailouts of Portugal and the Irish Republic were designed to tide both countries over until they could borrow commercially again, just as was hoped for Greece. If that hasn't been possible in Greece, investors may question whether the same solution will work for the other two bail-out recipients. There are also concerns about the situations in Spain and Italy, both of which have seen their borrowing costs rise recently. The Spanish and Italian economies are far bigger than those of Greece, Portugal and the Irish Republic and the European Union would struggle to bail them out if that became necessary. There has been much public opposition to the austerity programme 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 (2.1bn) 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. However, knock-on from Greece's troubles would exacerbate the UK's exposure to Irish debt, which is rather larger. The UK's direct contribution to any Greek bailout is limited to its participation as an IMF member. But the indirect effect of a Greek default on the UK would be incalculable. http://www.bbc.co.uk/news/business-13798000