By Louise Armitstead 11:02AM GMT 23 Feb 2012
Even for the Greek finance minister, Evangelos Venizelos, this week’s €130bn bail-out agreement was “great, painful and complicated”. They are about the only three words everyone involved in the debt crisis agrees on. Despite the breakthrough, the odyssey of the Greek debt crisis is nowhere near a conclusion, so if you’ve lost sight of how it all started, here’s a refresher:
Athens has tough conditions to meet to secure the actual payments within the next few days, as well as over weeks and months. Photo: GETTY
The first sign of trouble in Greece was when George Papandreou took over as prime minister in October 2009 and found that the government had been understating its public debts for years. Two months later Fitch downgraded Greece’s debt to BBB+, the lowest credit rating in Europe. Financial traders scrambled to work out the implications of a European Monetary Union that contained members with such different profiles as Greece and Germany.
But the reality was that the EMU was a very thin veneer over deep economic, political and cultural divisions.
Despite being poor, the Greek government has for decades sought to be generous to its people. Historians point to the war-torn decades, including a civil conflict after the Second World War that wiped out 10pc of the population followed by bloody clashes between Cyprus and Turkey in 1974: the Greek state has tried to soothe its people by creating a big welfare state and generous pay and pensions - including low retirement age and the famous 13th and 14th monthly salaries.
When it came to joining the euro in 2001, it should have been obvious that Greece did not meet the debt conditions. But, by spinning the numbers, Greece gained entry, not just to the single market but to debt markets that allowed it to borrow as though it was as dependable as Germany.
Greece went on a spending spree on infrastructure, services and public sector wages. Meanwhile, the Greeks stopped paying taxes. To Athens’ delight, banks and the financial markets filled the gap by lending billions of euros. With the onslaught of the credit crunch, Greece’s vast debts were exposed - but so was the exposure of European banks. If Greece went bust, untold damage could be unleashed across Europe and beyond: for a global economy still shattered from the 2008 banking crisis, the prospect of another one was intolerable.
Graphic: Explaining the Greek crisis 23 Feb 2012
Who's holding the debt?
Banks in Germany and France have the biggest exposure to Greek debt. According to the Bank for International Settlements they hold $22.6bn (£14.4bn) and $15bn of Greece's government debt respectively. These numbers soar with estimated private sector exposure - to $34bn for Germany and $56.7bn for France.
Behind the debt are vast amounts of CDOs - complex financial instruments bought by investors from investment banks to insure the debt - adding another threat from default.
Outside the eurozone, exposure to Greek debt is relatively small. But, whatever Brussels says, Greece is not a unique case: Portugal, Ireland, Italy and Spain also have vast debt piles that are also held by global banks.
British banks hold just $3.4bn of Greek sovereign debt and a total of $14.6bn with private lending exposure. But it has far closer links with Ireland, the UK’s biggest trading partner. And with London at the centre of European financial services, Britain also stands in the firing line of any banking crisis.
Solving the problem
The solutions have actually made things worse - or more complicated at least.
Politicians have been driven by a determination to make Greece pay for its overspending. Mr Papandreou unveiled the first austerity package in January 2010. Meanwhile, eurozone leaders resolved that despite being called “bailouts” the help would be in the form of loans. Their other key strategy has been to persuade others to buy the debt - from banks, central banks and governments.
Or, as critics point out, they decided to solve the debt crisis with more debt - and a highly contagious situation with an even more complex web of exposure.
In May 2010, leaders unveiled a €110bn (£93bn) bailout with money from the European Union (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF). But the so-called troika set tough conditions in return: the money would be released in 10 tranches and only once Greece had met tough austerity targets of spending cuts, tax rises and structural reforms.
At the same time, the European Financial Stability Facility (EFSF) was created to “provide financial assistance” to struggling eurozone countries. The fund was authorized to borrow up to €440bn, €250bn of which was immediately allocated to Ireland and Portugal as part of their bailouts.
The EFSF was to be backed by a €60bn European Stability Mechanism (ESM) - a permanent support vehicle for eurozone countries to borrow from, backed by the European Commission using the EU’s budget as collateral.
The bailout funds and mechanisms have sucked countries both inside and outside the eurozone into the debt crisis, not least through the EU, ECB and IMF support.
Within months it was clear the first Greek bailout fund was too small and Greece was missing its spending targets. Its total public debts were expected to hit 160pc of gross domestic product by the end of the 2011. Worse, starting with Germany and France, there was political backlash against any further exposure to profligate Club Med countries.
Meanwhile, the nail-biting roller coaster rides between tranche payments to Greece was becoming intolerable for financial markets and an embarrassment for Brussels.
In July leaders agreed another €109bn bailout, this time with an agreement that private bondholders would take a €50bn hit by accepting losses on their bonds without triggering CDS. They also said they would leverage the EFSF into a “big bazooka” bailout fund with €1 trillion firepower.
Political stand off
The deal was accompanied by more austerity demands on Greece that were duly passed in October. But the violence and opposition in Athens led to Mr Papandreou calling a referendum on the package without consulting the troika. Germany retorted by saying Greece would be cut off if the austerity measures were not agreed.
The political hand grenade was defused by a change of leadership in Greece. But the previously unmentionable option of a Greek exit and eurozone break-up had been let out of the bag.
The €130bn bailout will allow Greece to pay a €14.5bn bond due on March 20 and so avoid immediate default. This time round, private bondholders, banks and the ECB have all shared some costs in a bid to reduce Greece’s debt load. Even so, Athens has tough conditions to meet to secure the actual payments - including asset sales and deep spending cuts - within the next few days as well as over the coming weeks and months.
And to make it harder, Greece’s economy has collapsed. A document leaked on Tuesday shows that even the troika reckons the targets won’t be met and Greece will need yet another bailout.
The document said: “Even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole.”
It reckoned that the bailout may help reduce Greece’s debt to 160pc of GDP - not the 120pc target - by 2020. And even then Greece will need €245bn of extra support.
So that means more bailouts.