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Eurozone crisis explained

 The European Commission, the European Central Bank (ECB) and the International

Monetary Fund (IMF) say they have reached agreement with reece on re!orms to

put the nation"s trou#led economy #ack on track$ %t stake is the ne&t tranche o!

#ailout money that the government needs to pay its #ills$

'nce the Eurogroup and the IMF"s e&ecutive #oard have approved the conclusions

o! the !th review, the ne&t tranche o! *#n euros will #ecome availa#le, most likely,

in early +ovem#er,' said the troika o! #odies which has #een mulling i! %thens will

get any new loans$

 This is money !rom the -#n.euro (/0*#n, 123#n) #ailout agreed last summer$

Euro4one leaders have su#se5uently agreed a !urther -2#n.euro package, #ut this

has yet to #e !ully ratied #y mem#er states$ %nd it comes as reece announced

that the 6- decit is pro7ected to #e *$38 o! 9: . down !rom -$38 in 6-- . #ut

short o! the ;$<8 target set #y the E= and IMF$

 The wider aim o! the #ailouts is to shore up reece"s economy, calm the nancial

markets, and stop contagion spreading to other de#t.laden European economies$

%s part o! the latest 'three.pronged' agreement to solve the region"s huge de#t

crisis, private #anks holding reek de#t have now accepted a loss o! 3-8$

Why is Greece in trouble?

reece has #een living #eyond its means in recent years, and its rising level o! de#t

has placed a huge strain on the country"s economy$

 The reek government #orrowed heavily and went on something o! a spending

spree a!ter it adopted the euro$ :u#lic spending soared and pu#lic sector wages

practically dou#led in the past decade$ >owever, as the money ?owed out o! the

government"s co@ers, ta& income was hit #ecause o! widespread ta& evasion$

Ahen the glo#al nancial downturn hit, reece was ill.prepared to cope$ It was

given -#n euros o! #ailout loans to help it get through the crisis . and has now

#een earmarked to receive another -2#n euros$ But many !ear that will not #e

enough$ There has #een much pu#lic opposition to the austerity programme

Why did Greece need another bail out?

reece received its original #ailout in May 6--$ The reason it had to #e #ailed out

was that it had #ecome too e&pensive !or it to #orrow money commercially$ It had

de#ts that needed to #e paid and as it couldn"t a@ord to #orrow money !rom

nancial markets to pay them, it turned to the E= and the IMF$ The idea was to give

reece time to sort out its economy so that the cost !or it to #orrow money

commercially would come down$ But that did not happen$ Indeed, the ratings

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agency : recently decided that reece was the least credit.worthy country it

monitors$ %s a result, reece has lots o! de#ts that need to #e paid, #ut it cannot

a@ord to #orrow commercially and does not have enough money !rom the rst

#ailout to pay them$

9espite the #ailouts, many people think reece will de!ault$

 They certainly do in the nancial markets, which seem to have accepted that

reece is heading !or an 'orderly de!ault'$

In Duly, euro4one leaders proposed a plan that would see private lenders to reece

writing o@ a#out 6-8 o! the money they originally lent, whereas the latest plan

includes a 3-8 write.o@$ Ahat continues to worry the markets, however, is !ear o!

a 'disorderly de!ault' and the domino e@ect that might have within the euro4one$

Ma7or euro4one governments have #een criticised !or a lack o! political leadership,

and there have #een signs o! divisions within the ECB$ The concern in the markets

is that the euro4one"s political structures do not have the authority to deal with the

magnitude o! the economic pro#lems$ It is not yet clear i! the latest deal will go !ar

enough to reassure investors !or long$

Could the crisis spread?

 The aim o! the last reece #ailout . as with the rst #ailout . is to contain the crisis$

 The #ailouts o! :ortugal and the Irish epu#lic were designed to tide #oth countries

over until they could #orrow commercially again, 7ust as was hoped !or reece$ I!

that hasn"t #een possi#le in reece, investors may 5uestion whether the same

solution will work !or the other two #ail.out recipients$

 There are no concerns a#out the situation in Italy and pain$ The panish and

Italian economies are !ar #igger than those o! reece, :ortugal and the Irish

epu#lic and the European =nion would struggle to #ail them out i! that #ecame

necessary$

What would happen if Greece defaulted?

Europe"s #anks are #ig holders o! reek de#t, with perhaps /3-#n./<-#n

outstanding$ %n 'orderly' de!ault could mean a su#stantial part o! this de#t #eing

rescheduled so that repayments are pushed #ack decades$ % 'disorderly' de!ault

could mean much o! this de#t not #eing repaid . ever$

Either way, it would #e e&tremely pain!ul !or #anks and #ondholders$ Ahat"s more,

reek #anks are e&posed to the sovereign de#ts o! their country$ They would need

new capital, and it is likely some would need nationalising$ % crisis o! condence

could spark a run on the #anks as people withdrew their money, making the

pro#lem worse$ That condence crisis may spread to overseas #anks, which could

stop lending until the !ull e&tent o! a de!ault was known$ It might #e a repeat o! the

credit crunch that pushed European and the = into recession three years ago$

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What would it mean for the eurozone?

% reek e&it is seen #y some as inevita#le i! the country de!aulted$ The #ig 5uestion

would then #e, what a#out other heavily.inde#ted nations I! reece can !orce a

'haircut' on its creditors, then why not :ortugal or the epu#lic o! Ireland The

political and economic structures that have #ound the ;.nation #loc together could#egin to unravel$ erman pu#lic opinion is already tiring o! the government"s lead

role in #ailing out the euro4one in a #id to hold the #loc together$