And why are bond-holders getting 'haircuts'?
A 'haircut' is a loss in the value of an investment or security.The term is currently in the news as those bond holders who lent money to the Greek government face large losses
Looks like the European banks are going to be wearing their hair very short this year!
What happens when a country defaults?
Usually the national currency falls in value and this helps to make the goods of country concerned more affordable. International institutions like the IMF also arrange repayment plans or write offs/markdowns of debt.
Why would a Greek default be such a big deal? It's a small country!
1. Because it owes massive amounts to some of the biggest European banks. They will lose money or 'have a hair cut' as financial traders put it.
2. Greece cannot devalue its currency without leaving the euro - which might cause another financial crisis along the lines of banking crash of 2008
3. The fear of 'contagion' - of bigger countries in a similar position also defaulting. The EU could probably pay off Greek debts - but not those of Italy, for example.
What are they trying to do now?
The EU is making its loan (a.k.a bailout) dependent on Greece taking big steps to reduce its debts and restructure its economy. These measures include reducing public expenditure and and selling state assets. Until now we have had the worst of all worlds - Greece has not fulfilled its agreements while its economy is has suffered a severe drop in output.
Will the new measures work
Many economistsbelieve that economic and political pressures make this unlikely.
What are the options if the refinancing deal doesn't work?
No pretty ones.
1. Greece could default, leave the euro and write off its debts - a 'disorderly default'
2. The EU could arrange for Greece to leave the euro in an 'orderly' arrangement.
3. Germany could leave the euro, allowing it to devalue.
4 The euro could split into two linked currencies - one strong, one weaker (this has been strongly argued by Telegraph financial expert Ambrose Evans-Pritchard)
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