European debt crisis: Seven basics you need to know

Will this crisis ever be over?! The nations of the eurozone seem to be fighting endless battles to address fears about government finances. The worry is that unsustainable national debt loads will result in default, a financial panic, or a costly repair effort that puts a squeeze on the economy in Europe and beyond. Here's a backgrounder on the problem, its consequences, and possible ways forward.

By , Staff writer

1. Greece has already defaulted, in effect

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    A cyclists makes his way through long queues of vehicles in central Athens, on Tuesday. As the prospect of a disastrous debt default hung over Greece, the government faced strikes and protests Monday against new austerity measures needed to appease the country's rescue creditors.
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The turmoil over sovereign debts in Europe began with Greece, the member of the euro currency union whose government has by far the highest debt load relative to the size of the nation's economy.

Since spring 2010, investors in Greek government debts have essentially gone on strike, demanding much higher interest rates due to the perceived risk of default. By summer 2011, Greek bonds had interest rates 17 percentage points higher than rates on bonds from Germany, according to the International Monetary Fund.

Although few major news organizations have run headlines saying "Greece defaults ...," in one sense that has already occurred. Under a deal reached in July, private-sector holders of Greek government bonds will have to write off about 21 percent of their investment as a loss. That's different from Greece simply stopping all payment on its debts, but financial "default" can include lesser failures to make good on promises.

The agreed-upon "haircuts" for bond holders are a form of what finance experts often call an orderly default, in which debts are restructured (downsized or modified). The result is that creditors typically don't face a total loss. It can be the best way for both sides to make the best of a bad situation.

Many economists say more such restructuring can be expected in Greece, and perhaps in other eurozone nations. That's because, in a high-debt predicament, all-out austerity measures typically don't work. Slashed government spending has resulted in a deep recession in Greece, for example. And when a high-debt nation sees interest rates soar, that can prevent economic growth from keeping pace with the rising cost of servicing the debt.

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