Q&A: Greece's economic woes

What went wrong in Greece?

Greece's economic reforms that 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 went on a debt-funded spending spree, including high-profile projects such as the 2004 Athens Olympics, which went well over budget.

It 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.

Greece's economic problems meant lenders started charging higher interest rates to lend it money and widespread tax evasion also hit the government's coffers.

There have been demonstrations against the government's austerity measures to deal with its 300bn euro (£267bn) debt, such as cuts to public sector pay.

Now the government is having to access a 110bn euro (£95bn; $146.2bn) bail-out package from the European Union and International Monetary Fund.

Greece's problems have made investors nervous, which has made it more expensive for other European countries such as Portugal to borrow money.

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Greece is facing up to three years of recession - as it tries to slash its deficit.

Its government owes about 300bn euros ($400bn; £260bn) and has to pay off part of it this month.

This should now be met - the European Union and International Monetary Fund (IMF) announced a bail-out package on 2 May - the biggest in recent history.

They are offering 110bn euros (£95bn; $146.2bn) spread over three years - but on condition that Greece slashes public spending and boosts tax revenue.

Ratings agency S&P has already downgraded Greek debt to "junk", which means it views Greece as a highly risky place to invest.

There are fears that the Greek problem could spread to other eurozone countries, which are now anxious to bolster investor confidence.

Why is Greece in so much 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 during the past decade.

Public spending soared and public sector wages practically doubled during that time.

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.

Greece's budget deficit, the amount its public spending exceeds its revenues from taxation, last year was 13.6% of its gross domestic product (GDP). GDP is the value of all its goods and services. This is one of the highest in Europe and more than four times the limit under eurozone rules.

Greece's high levels of debt mean investors are wary of lending it more money, and demand a higher premium for doing so.

This is particularly troublesome as Greece must refinance more than 50bn euros in debt this year.

PROBABILITY OF COUNTRIES BEING UNABLE TO PAY BACK DEBT

With any debtor, there is a chance they will not be able to repay their debts. These figures in the above graph express the likelihood as a percentage called the Cumulative Probability of Default (CPD)

The figures express the probability of a country defaulting sometime over the next five years

Why is this a worry outside Greece?

Everyone in the eurozone - and anyone who trades with the eurozone - is affected because of the impact on the common European currency.

The most immediate impact is on the 15 other eurozone economies who have agreed to help out Greece. So taxpayers of these countries will effectively share a part of Greece's burden.

There are also fears that Greece's troubles in the international financial markets will trigger a domino effect, toppling other weak members of the eurozone, such as the so-called "Piigs" - Portugal, Ireland, Italy and Spain as well as Greece - all of whom face challenges rebalancing their books.

Fears have also been exacerbated by rating agencies. These private bodies assess whether or not countries, companies or financial products are worth investing in.

At the height of the international financial crisis, these agencies were heavily criticised for the very high ratings they gave to complex financial instruments dreamt up by Wall Street.

Now there are concerns that their downgrading of Greece, Spain and Portugal might trigger a sovereign debt crisis, where countries can no longer raise money to pay their bills.

Those fears have driven up the interest rates on government debt, meaning it is more expensive for these countries to borrow on the open market.

Finally, many major banks have invested in Greek debt. So the economic crisis could affect their shareholders, many of whom are ordinary investors or people who own their shares through pension funds.

What is Greece doing about it?

Greece has outlined plans to cut its budget deficit, or the amount its public spending exceeds taxation, to 8.7% of its GDP in 2010, and to less than 3% by 2012.

Just before the massive bail-out package was announced the Greek government pledged to make further spending cuts and tax increases totalling 30bn euros over three years - on top of austerity measures already taken.

Greece plans to freeze public sector workers' pay, make further cuts in civil servants' benefits, hike VAT (sales tax) and fuel duty, raise the retirement age and reduce pensions.

Greece's Socialist government says the nation faces "sacrifices" in a "choice between collapse or salvation".

How has this been received in Greece?

Not at all well. There has been a series of public protests, some of them violent. Wildcat strikes have hit schools and hospitals and brought public transport to a halt.

In the run-up to the international bail-out police fired tear gas at hundreds of demonstrators in Athens, after some tried to break through a police cordon guarding the Greek finance ministry.

Many public sector workers believe that the crisis has been engineered by external forces, such as international speculators and European central bankers.

The country's two main unions have called the austerity cuts "anti-popular" and "barbaric".

What happens next?

The EU says the first aid tranche will be paid before 19 May - the date by which Greece has to refinance an 8.5bn-euro bond. In total, up to 30bn euros is to be disbursed to Greece in the first year.

Eurozone leaders will meet again on 7 May to assess the situation. They hope the bail-out will be approved quickly by the parliament in Germany - a major pillar of eurozone stability. German public opinion is largely hostile to such a bail-out and Chancellor Angela Merkel has stressed all along the tough conditions that Greece must meet.

If Greece sticks to its pledges - and gets the EU-IMF lifeline - then its borrowing costs should fall and the euro should begin to strengthen after falling in recent weeks due to fears about Greece's ability to repay its debts.

Could Greece just leave the euro?

Currency traders have feared that some countries with large budget deficits - such as Greece, Spain and Portugal - might be tempted to leave the euro.

A country which left the euro could allow its currency to fall in value, and thus improve its competitiveness.

But it would cause huge ruptures in the financial markets as investors would fear other nations would follow, potentially leading to the break-up of the monetary union itself.

However, the EU has vowed to keep the eurozone together, and dismissed talk of countries leaving the euro.

It is uncharted territory too, so unlike under the old Exchange Rate Mechanism, which economies in trouble could leave when necessary, there is no legal mechanism for countries to leave the single European currency.

How does Greece's situation compare with other countries?

As this chart below shows, Greece is not the only nation breaking the eurozone rule which says that the budget deficit in each of the 16 member states must not exceed 3% of GDP.

The UK, whose figure of 13% is well beyond the 3% figure, is not a member of the eurozone.

I'm going on holiday to Greece, what does all this mean for me?

Noel Josephides is managing director of Sunvil Holidays, an independent tour operator for 40 years, which takes thousands of holidaymakers to Greece from the UK every year.

He said they had received a call from one customer who asked whether a "bankrupt Greece" would lead to them being asked to leave their hotel. Clearly this would never be the case.

Bookings for this summer are 11% higher than last year when some overseas holidays were hit by the recession in the UK, Mr Josephides said. They are now roughly the same as 2008, which is a more typical year for bookings, he said.

He said that the Greek islands were open for business and the weakening euro had lowered the cost of European trips.

This came after many hoteliers dropped prices by 5-10% at the start of the year because of the strength of the euro against the pound at that time.

"They recognised that the euro was strong and they wanted the business. A lot of prices have also fallen in restaurants," he said.