Eurozone crisis explained

* Key elements of deal
* Contagion
* Italian woes
* Why Greece?
* Your money

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What went wrong in Greece?

An old drachma note and a euro note
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.

The opening ceremony at the Athens Olympics
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.

A defunct restaurant for sale in central Athens
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.

A man with a bag of coins walks past the headquarters of the Bank of Greece
Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.

Workers in a rally led by the PAME union in Athens on 22 April 2010
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.

Greek Prime Minister George Papandreou at an EU summit in Brussels on 26 March 2010
In July 2011, Eurozone leaders and the IMF agreed to lend Greece 109bn euros ($155bn, £96.3bn) - a year after it was granted access to a 110bn euro rescue package.

Greece's problems have made investors nervous, which has made it more expensive for other European countries such as Portugal to borrow money.
Eurozone ministers were worried that if Greece was to default there would be a risk of contagion to other economies. They hope the package will resolve Greece's debt crisis and shore up the euro.

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Global Economy

* Euro deal at a glance
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* Europe's four big dilemmas
* Experts debate eurozone options

The European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) say they have reached agreement with Greece on reforms to put the nation's troubled economy back on track.

At stake is the next tranche of bailout money that the government needs to pay its bills.

"Once the Eurogroup and the IMF's executive board have approved the conclusions of the fifth review, the next tranche of 8bn euros will become available, most likely, in early November," said the troika of bodies which has been mulling if Athens will get any new loans.

This is money from the 110bn-euro ($148bn, £95bn) bailout agreed last summer. Eurozone leaders have subsequently agreed a further 109bn-euro package, but this has yet to be fully ratified by member states.

And it comes as Greece announced that the 2011 deficit is projected to be 8.5% of GDP - down from 10.5% in 2010 - but short of the 7.6% target set by the EU and IMF.

The wider aim of the bailouts is to shore up Greece's economy, calm the financial markets, and stop contagion spreading to other debt-laden European economies.

As part of the latest "three-pronged" agreement to solve the region's huge debt crisis, private banks holding Greek debt have now accepted a loss of 50%.

Why is Greece in trouble?
Understanding the crisis

* Key threat: Domino effect
* In graphics: Compare economies
* What is a rating agency?
* Q&A: Bonds and eurobonds

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 - and has now been earmarked to receive another 109bn euros.

But many fear that will not be enough.
Protesters clash with police in Athens on 15 June There has been much public opposition to the austerity programme

Why did Greece need another bail out?

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 EU and the IMF.

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.

Despite the bailouts, many people think Greece will default.
Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
Default
Default
Strictly speaking, a default occurs when a borrower has broken the terms of a loan or other debt, for example if a borrower misses a payment. The term is also loosely used to mean any situation that makes clear that a borrower can no longer repay its debts in full, such as bankruptcy or a debt restructuring.
A default can have a number of important implications. If a borrower is in default on any one debt, then all of its lenders may be able to demand that the borrower immediately repay them. Lenders may also be required to write off their losses on the loans they have made.
Glossary in full

They certainly do in the financial markets, which seem to have accepted that Greece is heading for an "orderly default".

In July, eurozone leaders proposed a plan that would see private lenders to Greece writing off about 20% of the money they originally lent, whereas the latest plan includes a 50% write-off.

What continues to worry the markets, however, is fear of a "disorderly default" and the domino effect that might have within the eurozone.

Major eurozone governments have been criticised for a lack of political leadership, and there have been signs of divisions within the ECB.

The concern in the markets is that the eurozone's political structures do not have the authority to deal with the magnitude of the economic problems.

It is not yet clear if the latest deal will go far enough to reassure investors for long.

Could the crisis spread?
Deficit graphic detail

* In graphics: Compare economies

The aim of the last Greece bailout - as with the first bailout - is to contain the crisis.

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 Italy and Spain, both of which have seen their borrowing costs rise.

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.

What would happen if Greece defaulted?
Detail of Greece decision tree

* What now for Greece? You decide

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.

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.

That confidence crisis may spread to overseas banks, which could stop lending until the full extent of a default was known.

It might be a repeat of the credit crunch that pushed European and the US into recession three years ago.

What would it mean for the eurozone?

A Greek exit is seen by some as inevitable if the country defaulted. The big question would then be, what about other heavily-indebted nations?

If Greece can force a "haircut" on its creditors, then why not Portugal or the Republic of Ireland?

The political and economic structures that have bound the 17-nation bloc together could begin to unravel.

German public opinion is already tiring of the government's lead role in bailing out the eurozone in a bid to hold the bloc together.

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