THE perilous financial status of Greece and its impact on the future of the Eurozone have dominated the headlines for months. Investors wonder when it will all end and, more importantly, how it will end. UBS analysts who have stayed abreast of events in the unfolding saga offer some insights on how to read current state of play.

Eurozone finance ministers recently agreed on a second bailout package for Greece, including 130 billion euros (US$170 billion) in new loans, a haircut for private investors and an overly ambitious consolidation plan, with which Greece is unlikely to be able to comply.

We continue to expect Greece to default on its government bonds by March. We think that the haircut for bonds held by the private sector will need to be enforced in order to achieve the desired debt reduction.

For financial markets, the good news is that there will not be a near-term Greek exit from the euro and no uncontrolled default, so the main investor focus should shift towards the general growth outlook for Europe. However, Greece is being left with an unsustainable debt burden and an unrealistic austerity plan that is prone to fail.

We have published extensively on Greece and our scenarios. Here we chose 10 frequently asked questions covering recent developments.

Q1: What is going to happen with the additional 130 billion euros?

The money is not really for Greece; it is primarily for creditors. To facilitate the private sector bond exchange into newly issued bonds, Greece requires 30 billion euros to buy AAA-quality collateral securing the principal value of the new bonds. In addition, the Greek banks need about 50 billion euros in fresh capital or they would otherwise become insolvent after contributing to the haircut on Greek government bonds. The remaining 50 billion euros from the package will be paid into an escrow account, with the primary purpose of paying interest on bonds and bailout loans. There is little in there for Greece itself.

Q2: Could delays arise to the disbursement of the new loans? What could stand in the way?

The second bailout plan still needs to receive final approval, including parliamentary approvals from several European countries. We expect more political noise surrounding these approvals, but we think this hurdle is going to be passed by the EU summit on March 1. In early March, Greece will launch the private sector exchange offer, and first results may be expected by March 11. Following completion of the exchange offer, the first tranche of the new package should be disbursed.

Q3: Will Greece now avoid a default?

We think default is part of the plan. The targeted debt reduction assumes that at least 90 percent of Greece's outstanding bonds would be voluntarily submitted for the private sector exchange. Investors would take a 53.5 percent cut on the nominal value and receive new 30-year bonds with a coupon of 2 percent until 2015, 3 percent until 2020 and 4.3 percent thereafter. The combined net present value loss resulting from the haircut and the low coupons on the new bonds would be more than 70 percent. Investors not accepting the offer may hope for a full repayment of their bonds in case there is a sufficiently high participation rate. This speculation will in our view lead to a too-low participation rate.

Greece has already prepared a new law to retroactively include so called "collective action clauses" into issued bonds. These clauses would enable enforced participation of investors failing to accept the offer and would also trigger credit default swaps (CDS), which are important to those investors who tried to protect against losses on their Greek bonds by buying CDS protection. We think Greece will use the clauses by mid-March and trigger a default event ahead of a 14.5 billion euro bond redemption on March 20.

Q4: How long will this new bailout program last?

While the new plan is ambitious enough to come up with a 120.5 percent estimate for Greece's debt-to-GDP ratio by 2020 (down from 160 percent now), the new 130 billion euro support loan program is covering only the period through 2014. Even assuming Greece would be able to meet this plan, European Central Bank calculations indicate that a further 50 billion euros in loans would be required to get to 2020.

However, we think the new plan will be challenged already within the next six months because the economic estimates for Greece are far too optimistic and the impact of the new austerity measures will be much more devastating for the economy and government revenues. However, when European finance ministers, the International Monetary Fund and the European Central Bank reconvene to negotiate amendments to the second or even already the third bailout package, there will only be European taxpayers left to take a further haircut, and the Greek public will likely be desperate and reluctant to accept further years of economic depression. At that point, an exit from the euro will be back on the agenda.

Q5: Wouldn't a default be easier? A big cut and a new start?

In the short-term, a full-blown government default would be a very painful event and the financial system would be hit substantially by follow-on insolvencies of banks and corporations in Greece or those strongly exposed to Greece. It would also send a very frightening signal to investors exposed to Portuguese and Irish assets. However, if we were to look ahead five years and compare the current bailout approach to a full default and exit from the euro, Greece may be better off with the full default and its own currency. However, weighing all political and economic considerations, we think that the current approach will still be preferred by decision-makers going forward.

Q6: As an investor holding Greek bonds, what should I do now?

History tells us that banks and hedge funds tend to receive the best deals in a debt restructuring. However, if the risk to an investor holding Greek bonds is not a full chaotic default, but merely the usage of collective action clauses, then there is little downside to those waiving the bond-exchange offer but a huge upside if Greece should not exercise the clauses. We refrain from such a speculative recommendation, but we think that a number of investors may waive the offer due to this consideration and therefore contribute to a below-target participation rate.

Q7: Who are the winners of this renewed bailout?

Banks and insurance companies, which can exchange their bonds in an orderly process, limiting both their current losses and further downside due to the AAA collateral provided for the new bonds. Both the EU countries and Greece are losers, in our view, because they failed to resolve an unsustainable debt situation and burdened their taxpayers with huge future claims.

Q8: What will be the effect on banks?

European banking earnings should be marginally revised down, but we think that the earnings impact of the higher net present value cut in the bond exchange will be manageable. Banks are now broadly supported by almost unlimited liquidity from the European Central Bank. We think bank stocks may benefit from the Greek deal in the near term, but we maintain a more conservative positioning on a longer time horizon.

Q9: Will Portugal and other Eurozone countries like Spain and Italy also need additional help?

Portugal is likely to require further amendments to its current consolidation plan and further financial support beyond mid-2013. Spain and Italy have shown considerable efforts to consolidate. Their funding costs have declined but are still highly elevated with risk premiums over German bonds of more than 300 basis points. We think the near-term economic development in both countries will be crucial to both the question about their possible need for external support as well as to the severity of the European debt crisis as a whole. We continue to believe that Italy would be too large to be supported by the bailout fund.

Q10: Markets have trended upward. Do you see this trend continuing now that the worst has been avoided for Greece?

Markets priced in much of the bailout decision ahead of the fact, and the recent upward trend may require a near-term correction, possibly driven by profit-taking. Having removed the euro break-up risk, at least for now, should be supportive for risky assets. While Greece and other weaker countries in Europe continue to have the potential to unsettle markets, the focus is likely to shift toward economic fundamentals in the larger European economies, like Germany, France, Italy, the UK and Spain.

Thomas Wacker is an analyst with UBS AG. Pierre Weill is an economist with UBS AG.