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Top European leaders sounded confident that Greece's bailout deal can be agreed at a eurozone finance ministers' meeting on Monday.
German Chancellor Angela Merkel, Greek Prime Minister Lucas Papademos and Italian Premier Mario Monti held a conference call and are "optimistic" the rescue package can be cleared.
French Prime Minister Francois Fillon warned that Europe needed to step in to support Greece and not allow a default.
Market reaction: Stocks rose in Europe, with Germany's DAX closing 1.4 percent higher, while the euro gained 0.2 percent to $1.3155.
What's next: European finance ministers will discuss the Greek bailout and a bond swap agreement with Greece's private creditors at a meeting Monday.
Q: Why is this budget-cutting so important?
A: Without it, the country would not be eligible for a euro130 billion ($170 billion) bailout from other countries in Europe and the International Monetary Fund. Greece needs the money ahead of a euro14.5 billion ($19.2 billion) bond deadline on March 20 and to strike a vital debt-relief deal with bond investors.
Q: And if Greece were to miss this March 20 bond payment, then what?
A: A disorderly Greek default would potentially spread the crisis to other eurozone countries, by making investors even more leery of lending to them. And analysts fear it could set off a chain reaction similar to the financial meltdown that occurred in the fall of 2008 and triggered the Great Recession.
Q: Didn't Greece already get a massive bailout? Why wasn't that enough?
A. Greece has been surviving since May 2010 on a euro110 billion ($146 billion) bailout. But the terms of that bailout were harsh, requiring higher taxes and deep cuts in public spending. Those actions pushed Greece deeper into recession, and the country's failure to control spending caused its debt burden to rise.
Q: How badly is Greece doing?
A: Its economy shrank at an annual rate of 5 percent in the third quarter of 2011, the most recent quarter for which data are available. Earlier in the year, it was shrinking at an 8.3 percent rate-- about as fast as the U.S. economy was shrinking during the worst of the Great Recession. Thousands of shops and small businesses, vital to the Greek economy, have gone bankrupt. Unemployment stands at 20.9 per cent.
Q: What are the terms of the debt-relief deal Greece is negotiating?
A: Banks, hedge funds, pension funds and other private investors who own euro206 billion ($273 billion) in Greek government bonds would exchange them for a payment of euro30 billion ($40 billion), plus euro70 billion ($93 billion) in new bonds. The payment will come from the euro130 billion ($172 billion) package from Europe and the IMF. The new bonds would have a lower average interest rate and a longer term of maturity.
Q. How will the rest of the euro130 billion ($172 billion) bailout be used?
A. Greece will invest roughly euro40 billion ($53 billion) in the country's banks, who would be at risk of collapse from the losses they take on Greek government bonds as part of the debt-relief deal. The remaining euro60 billion ($79.5 billion) will be used for financing the country's deficit.