AFP/Getty Images

Story highlights

Greece is in negotiations over its latest bailout deal, but needs to meet harsh new terms

The country is implementing austerity measures but faces protests and deteriorating finances

The default of a eurozone member is politically and economically charged

London CNN —  

What is the Greece debt deal?

Greece, the country at the center of the eurozone debt crisis, pushed through a huge debt swap in March to save it from disorderly default and clear the way to receive its second bailout, worth €130 billion ($171.5 billion).

The country’s massive pile of debt has threatened the stability of the 17-country eurozone during a crisis which has dragged on for almost two years. The announcement that Greece successfully pushed through the largest ever sovereign debt restructuring gives some breathing space as the bloc attempts to pull itself back from the brink.

In the deal, the country swapped existing bonds for new ones that are worth far less, effectively halving the country’s €206 billion bill to private sector creditors.

The restructuring takes pressure off the country in the short term, but as it struggles to rein in huge debts, questions remain over its ability to remain in the eurozone.

At the time of the swap, David Watts, of Creditsights, said: “It seems unlikely that the Greek [debt deal], despite its sizeable writedown, is the last we’ve seen of Greece in this crisis.” He added, “there are still questions overhanging the restructuring and further questions over whether this deal makes Greece’s debt position sustainable.”

Does Greece still face disorderly default?

The decision to insert collective action clauses in Greek bonds – which enabled the country to force through the debt swap against the will of some creditors – was deemed by ratings agency Standard & Poor’s to be a “selective default.” Investors who hold credit default swaps on the country’s debt – a type of insurance against default – were paid out following the deal.

However, the greater fear has been that Greece will face disorderly default, or a sudden inability to pay its bills. That has been avoided for now, but the country is facing a contracting economy and its debt is currently at 160% of its GDP. Questions are already being raised about the ability for Greece, which is entering its fifth year of recession and struggling under harsh austerity measures, to pull through without further restructuring.

An election expected in May is likely to further shine the spotlight on Greece’s commitment to the austerity measures which it was forced to implement in exchange for the bailout packages from its eurozone peers and the International Monetary Fund.

Throughout the crisis, which was triggered after Greece admitted its finances were far worse than first reported, the country has faced protests on the street and an inability to raise money from investors, leaving it reliant on the bailout funds.

Why is Greece still being supported?

The financial collapse of a eurozone member is politically and economically charged. The common currency lies at the heart of the “European dream” and a disorderly default by one its members would be devastating.

So Greece is being supported by its eurozone peers as Europe’s leaders, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy, desperately attempt to figure out how to fix the problems.

The potential for the crisis to spread to Italy and Spain – the so-called “contagion” effect – is a powerful incentive to contain the problem. Bailouts of Greece, Ireland and Portugal have created backlashes in countries such as Germany where the prospect of holding up the bloc’s far larger economies is economically and politically unpalatable.

So what are Europe’s leaders doing?