Greece's deepening debt crisis could cause fall of euro

LONDON - Greece's debt crisis is showing increasing signs of getting out of control despite a deal to bail out the debt-laden Mediterranean country. Here are some questions and answers about the crisis:

Could the crisis cause the euro to break up?

Yes, in theory. A year ago such talk would have looked outlandish and been dismissed as the rantings of an extreme eurosceptic. But the Greek debt crisis has brought doubts about the foundations of the monetary union. For investors the crisis has exposed the euro experiment's design flaw - the lack of budgetary controls alongside the rigidity of a fixed, single currency. Governments can spend their way into trouble - but can't devalue their way out.

Is it possible to leave the euro?

There are no specified legal or constitutional mechanisms for abandoning the euro. But that doesn't mean it's impossible if the will is there - after all the euro is a political project, the culmination of over 50 years of post-war European co-operation and integration. But it would be difficult and possibly chaotic.

What advantage could there be for anyone leaving the euro?

The allure is having control of your own currency and monetary policy, which would allow governments in financial trouble to devalue their currency and their debts. But the costs could be extremely high.

As well as raising borrowing costs - interest rates on the euro would no doubt be lower than those for a returning Greek drachma or Spanish peseta - investors will likely shy away from any country that has been kicked out or unilaterally decides to leave the euro.

A country could also face a severe financial crisis and bank runs as investors rush to get their euros out before they're converted and devalued. Technical obstacles like accounting software and contracts would be an enormous headache. It took years to set up the euro in the first place.

Is it just small, indebted countries that might want out?

Germany is not happy about having to help bail Greece out. In fact, one of the scenarios laid out for a potential euro breakup is a financially solid country fed up with lax monetary policy.

Abandoning the deutsche mark was not popular - for many Germans it was their cherished solid currency associated with recovery and prosperity after the destruction of World War II. However, would Germany want to abandon its partners, leaving a trail of chaos around its borders - and ditch its role as a supporter of European integration?

Leaving sounds rough. What's next?

There are growing expectations that the European Central Bank will take a more active role - there are mounting expectations that it will break its own rule-book and do something more drastic, such as buying government bonds in the markets to preserve the stability of the euro.

The concern is that the Greek Government, however sincere, will find it difficult to push through the severe austerity plans implied by the €110 billion joint eurozone-International Monetary Fund bailout package. The Greek protesters think the austerity plan is too draconian and it could produce a long-lasting economic depression by removing government stimulus from the economy to pay debt.

Many think Greece will default anyway, in spite of the bailout. Why?

Many economists think the austerity could make the budget deficit even worse because it implies sky-high unemployment alongside an economic implosion - hardly a recipe for lower government spending or a higher tax intake. There's a growing consensus that Greece will have to restructure its debts - telling creditors it needs more time to repay or paying back less. Even that will still mean years of pain.

- AP