Eurozone crisis explained

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?
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. 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.
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?
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 no concerns about the situation in Italy and Spain. 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?
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.