Why did the crisis not end with the Greek bailout?
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 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 has 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.
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.
A Greek exit from the euro is seen by some as inevitable if the country defaulted. The big question would then be, what about other heavily-indebted nations in the eurozone?
It might be a repeat of the collapse of Lehman Brothers, which sparked the credit crunch that pushed Europe and the US into recession.
ATHENS — Weary Greeks looked ahead at a long day of political wrangling on Friday before a confidence vote that could determine whether Greek Prime Minister George Papandreou remains their leader through the current financial crisis.
The vote, which will take place in Parliament in the evening, is far from assured. a day after Papandreou backed away from a proposal to hold a referendum on a European bailout plan. His move removed a significant obstacle that had rattled global markets and imperiled plans to halt a spreading economic crisis, but it came only after much of his already-wobbling support had washed away.
Thursday was filled with political intrigue and drama, and by its end, Greek politicians for the first time had coalesced around the rescue deal after the opposition dropped its objections. But the plans still require Parliament’s approval, and politicians remained at odds over whether Papandreou would stay or go. The opposition has called for elections by the end of the year, which Papandreou opposes, suggesting that the deal could still fall apart.
Regardless of the political outcome, Greece appears far more likely to participate in the bailout than it did just days ago, when the prospect of a December referendum meant uncertainty lingering for weeks. Instead, European leaders can move on to other pressing issues, such as how to bolster Europe’s bailout fund to guard against shakiness in Italy and Spain.
But the political instability within Greece could still delay the precise contours of the plans. If Papandreou loses the vote Friday night — a distinct possibility, since Socialists controls only 152 of the 300 seats of Parliament, and one Socialist deputy has already vowed to vote against him — he would likely be forced to step down in favor of a caretaker government, with elections following shortly thereafter. If he wins, he would still preside over a government in which many of his top associates have lost patience with him. Some reports in Athens have suggested he had worked out a deal with his cabinet to step aside in favor of technocratic caretakers even if he prevails in the confidence vote.
Papandreou’s proposal to hold a national referendum on the bailout plan, a vote that would also determine Greece’s future in the euro zone, had caused fissures within his Socialist party and sent shock waves through Europe. In Frankfurt, Germany, the European Central Bank said Thursday it would lower interest rates by a quarter percentage point, indicating deep concerns about Europe’s outlook. In Cannes, France, where leaders at the Group of 20 summit had warned they would cut off all support to Greece until the referendum was resolved, the drama dominated discussions.
In a speech to Socialist party officials Thursday evening, Papandreou said shooting down the bailout plan “means leaving the euro.”
“If the opposition is willing to negotiate, then we are ready to ratify this deal and implement it,” he said, adding that he had invited the main opposition party to be “co-negotiators” with his country’s creditors.
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