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Q&A: THE DEAL EXPLAINED

Q. WHY DOES THE EUROZONE NEED A SAFETY NET?

A. Since last autumn fears have snowballed over Greece’s ability to service its huge €300bn (£258bn) debt pile. After credit rating agencies cut Athens’ status, markets cranked up the interest rates on the country’s bonds to unsustainable levels. A separate €110bn package of loan guarantees produced for Greece at the start of the month failed to impress traders, leading to worries the nation could be pushed into default. In the words of Sweden’s finance minister Anders Borg, a more comprehensive safety net had to be developed or the “wolfpack” of markets would “tear the weaker countries apart” – meaning not only Greece but also Spain, Portugal and Ireland.

Q. WHERE WILL THE MONEY COME FROM IF IT’S NEEDED?

A. The first pot of €60bn can be drawn on by any of the 17 European Union member states and is funded by EU countries. The UK will stump up 13 per cent of this sum, equal to £8bn. The meat of the measure, €440bn in bi-lateral loan guarantees for nations in financial crises, is provided by the 16 members of the euro currency and excludes Britain. The international Monetary Fund has said it will make an additional €250bn available to Eurozone countries. The headline figure of €750bn is mammoth and designed to catch the attention of markets. Policymakers hope the announcement will ease pressure on Greece and Spain so they do not need to call on the emergency aid.

Q. WHAT ARE THE MAIN RISKS TO THE DEAL?

A. In the words of Evolution Securities’ Gary Jenkins, the €750bn package is “the last throw of the dice”. In the short term, Europe has bought time to help Greece rearrange its parlous finances. A form of “fiscal union lite” is likely, whereby weaker countries’ budgets are checked more strictly against the Eurozone’s Growth and Stability pact. The major dangers are political. German taxpayers will feel unenthusiastic about bailing out their Mediterranean colleagues.