Greece's financial crisis explained

first in what is expected to be a series of strikes has begun in Greece this week as workers protest against austerity measures imposed by a government trying to dig its way out of a financial crisis that threatens to engulf Europe.

What’s the problem in Greece?
Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. This whisked away a curtain of partly fiddled statistics to reveal debt levels and deficits that exceeded limits set by the eurozone.

How big are these debts?
National debt, put at €300 billion ($413.6 billion), is bigger than the country's economy, with some estimates predicting it will reach 120 percent of gross domestic product in 2010. The country's deficit -- how much more it spends than it takes in -- is 12.7 percent.

What happens now?
Greece's credit rating -- the assessment of its ability to repay its debts -- has been downgraded to the lowest in the eurozone, meaning it will likely be viewed as a financial black hole by foreign investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise. The Greek government of Prime Minister George Papandreou, which inherited much of the financial burden when it took office late last year, has already scrapped most of its pre-election promises and must implement harsh and unpopular spending cuts.

Will this hurt the rest of Europe?
Greece is already in major breach of eurozone rules on deficit management and with the financial markets betting the country will default on its debts, this reflects badly on the credibility of the euro. There are also fears that financial doubts will infect other nations at the low end of Europe's economic scale, with Portugal and the Republic of Ireland coming under scrutiny. If Europe needs to resort to rescue packages involving bodies such as the International Monetary Fund, this would further damage the euro's reputation and could lead to a substantial fall against other key currencies.

What is Greece doing?
As already mentioned, the government has started slashing away at spending and has implemented austerity measures aimed at reducing the deficit by more than €10 billion ($13.7 billion). It has hiked taxes on fuel, tobacco and alcohol, raised the retirement age by two years, imposed public sector pay cuts and applied tough new tax evasion regulations.

Are people happy with this?
Predictably, quite the opposite and there have been warnings of resistance from various sectors of society. Farmers have begun blockading roads to demand greater government subsidies, while on February 10, workers nationwide staged a one-day strike closing airports, government offices, courts and schools. More strikes are expected to follow.

Can't Greece's European neighbors step in to help?
With the reputation of the region's single currency on the line, powerful eurozone partners are keen to see Greece's problems resolved, but analysts say European Union and European Central Bank rules are unclear and seem to rule out bloc-wide rescue packages. This leaves it up to member nations -- all of which are saddled by their own debt problems -- to cobble together their own bailout plans. There are reports that the eurozone's dominant economy, Germany, is leading calls for a "firewall" to prevent Greece's crisis from spreading, but as yet no concrete proposals have been made public.

EU Gives Greek Officials 'Only Days' To Explain Complex Deals That Hid Debt

Greece has only days to explain its use of complex financial deals that it used to mask debt and just a month to prove that its drastic budget cuts go far enough to reassure markets and EU governments, who are reluctant to bail Athens out if it can't pay its bills.

Greece's troubles has plunged the 16 nations that use the euro into a crisis by breaking rules on debt and deficit that underpin Europe's currency union amid worries that its problems could be even bigger because its public finance figures cannot be trusted.

The EU's top economy official, Olli Rehn, said Tuesday that he wanted the Greek government to supply answers by Friday on how it used currency swaps and how that affected debt and deficit figures.

European Union finance ministers on Tuesday also gave Greece a deadline of March 16 to show that it can make big spending cuts to bring its deficit down from the EU's highest, 12.7 percent, to 8.7 percent this year.

They said in a statement that this was essential to "remove the risk of jeopardizing the proper functioning of economic and monetary union."

Eurozone nations – who have pledged to provide a financial bailout to Greece if needed – said they would demand new spending cuts, higher value-added taxes and fuel taxes and new taxes on luxury goods, including cars, if Greece can't make the deficit reductions it is promising.

Greece now has a month to show that it can make real savings from a freeze on public sector salaries, cuts to bonuses and stipends and promises to reform pensions and health care.

The government is facing opposition at home. Greek customs officials walked off the job Tuesday for a three-day strike which will hamper imports and exports.

But Greek Finance Minister George Papaconstantinou insisted that he is already ahead of schedule on swinging budget reductions and that public finances reported a slight surplus last month thanks to a one-off tax on large companies.

"It's a matter of credibility for the country," he told reporters. "The execution of the Greek budget for the month of January, based on preliminary figures, is going quite well. We have actually a surplus."

Greece says it isn't asking for financial help and won't need any – but it is facing a credibility crisis as a Feb. 1 report commissioned by the Greek finance ministry warns of "significant debt revisions" for 2009 statistics due to swaps, debt to suppliers and state-guaranteed loans that may default.

The report said some swaps are now "being done in order to transfer interest from the current year to the future, with long-term loss to the Greek state."

Rehn said "it is clear that a profound investigation must be done on this matter," promising that he would check to see if all rules were respected.

"If it turns out that there is such kind of securitization of swaps that are not in line with the rules of the time, then of course we would need to take action," he said.

The EU can take Greece to court, under threat of daily fines, to change its statistics methods. It is already threatening legal action for Greece's failure to report accurate public finance figures last year.

Papaconstantinou said Monday that such swaps were legal when Greece used them and that it is not using them now and will stick to EU statistics rules on new financing deals.

Papaconstantinou also said Greece was not alone among EU nations in using such deals. Rehn said he was not aware of similar problems with other countries but that "this has still to be verified."

Rehn also took a shot at the investment banks that advised Greece to mask debt. Reports in The New York Times and Germany's Der Spiegel said that Greece used U.S. financial institution Goldman Sachs to engage in the swaps. The bank did not comment when contacted last week.

"I think the banks themselves should also ask, not least after the financial crisis, if this has been in line with the code of ethics," he said.

Traders' fears that Greece might not make debt repayments increased Tuesday, with the spread of the Greek government bond widening to 3.35 percentage points against the benchmark German bond. The spread was below 3.00 points last week on hope of a detailed eurozone bailout plan.