Q&A: Greek debt crisis
Continue reading the main storyWhat 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.
Former European Central Bank vice-president Lucas Papademos has been named as Greece's interim prime minister, following days of negotiations.
He will head an interim government being formed to make sure the debt-strapped country gets its latest bailout payment.
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 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.
Greece and its huge debts have weighed on the eurozone for more than a year.
The country has been bailed out twice - and investors still fear a default.
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.
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. 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.
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.
Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
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.
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.
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?
Although Greece's troubles are the most extreme, they highlight problems in the eurozone that also apply to 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.
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.
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.
What would happen if Greece defaulted?
There has been much public opposition to the austerity programme
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.
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?
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.
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.
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.
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