How Europe's debt crisis evolved: a Q + A

(BRUSSELS) - Initially limited to Greece, Europe's almost two-year-old debt crisis has spilled across borders, threatening large economies as well as the continent's banks.

Question: How did things get so bad?

Answer: The answer begins in the rubble of World War II, when defeated Germany rebuilt relations with France. Western governments also resolved to set up welfare systems for ever-expanding populations, and over decades, governments got into the habit of spending more than they earned, with debt now representing 100 percent of the wealth produced each year. After the 2008 financial crisis, governments borrowed even more, to levels incompatible with growth.

Q: Why is Greece in crisis?

A: When governments came together in 1999 to share a new euro currency, the pressure to conceal dangerous over-spending proved too much for Greece. In 2009 it finally admitted to dodgy statistics that covered up its inability to manage public spending. News of the country's ballooning deficit caused banks to hike rates to lend it more cash, until the tap eventually ran dry. To avoid bankruptcy, Greece turned to its European neighbours and to the International Monetary Fund (IMF) for help in the spring of 2010. A second bailout is also on the cards, but only on condition of a drastic austerity drive by Athens.

Q: Why hasn't the Greek problem been resolved?

A: The first international bailout addressed Greece's pressing immediate problems, but since then, recession has worsened and its 350-billion-euro debt mountain continues to grow. That is why a second rescue will, for the first time, demand that banks share a part of the burden.

Q: Why hasn't the second rescue plan been implemented?

A: Agreed on July 21, the second bailout has faced mounting opposition from countries such as Slovakia, unwilling to continue filling Athens' empty coffers. Greece too has been accused by its international rescuers of failing to hold to its promises to cut spending and privatise state assets. This year, paying out each slice of promised aid to Greece has become a psychodrama as the second rescue package is left hanging.

Q: Why is there concern over a possible banking crisis?

A: After spreading to frail countries Ireland and Portugal, the debt crisis this summer threatened banks holding debt from countries in difficulty. Available monies began to dry up, and as the fear of contagion spread, banks became reluctant to led to each other, jeopardising the entire credit system.

Q: Will Sunday's summit spell an end to Europe's debt crisis?

A: The whole world awaits a resolution. European leaders will need to stabilise Greece, set up a credible financial firewall to stave off any contagion to large economies such as Italy and Spain, and recapitalise banks.