Greece's economic reforms that led to it abandoning the drachma as its currency in favour of the euro in 2002 made it easier for the country to borrow money.
Greece went on a debt-funded spending spree, including high-profile projects such as the 2004 Athens Olympics, which went well over budget.
It was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.
Greece's economic problems meant lenders started charging higher interest rates to lend it money and widespread tax evasion also hit the government's coffers.
There have been demonstrations against the government's austerity measures to deal with its 300bn euro (£267bn) debt, such as cuts to public sector pay.
Now the government is having to access a 110bn euro (£95bn; $146.2bn) bail-out package from the European Union and International Monetary Fund.
Greece's problems have made investors nervous, which has made it more expensive for other European countries such as Portugal to borrow money.
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Eurozone members and the IMF have agreed a 110bn-euro (£95bn; $146.2bn) three-year bail-out package to rescue Greece's embattled economy.
In return for the loans, Greece will make major austerity cuts which Prime Minister George Papandreou said involved "great sacrifices".
The EU will provide 80bn euros in funding and the rest will come from the International Monetary Fund (IMF).
The deal is designed to prevent Greece from defaulting on its massive debt.
However, it must first be approved by some parliaments in the 15 other eurozone countries.
Luxembourg's Prime Minister, Jean-Claude Juncker, said up to 30bn euros would be disbursed to Greece in the first year. The first loan tranche will be released before 19 May - the date of Greece's next debt repayment, he said.
The leaders of the 16-nation Eurogroup will hold a summit in Brussels on Friday to "draw initial conclusions from the Greek crisis", he added.
Shoring up confidence
HEWITT ON EUROPE
Gavin Hewitt BBC Europe editor
This was a day the European Union never imagined - that what could turn out to be the largest bail-out ever would be needed by a country using the euro.
Rescuing Greece remains very unpopular, especially in Germany, but German Chancellor Angela Merkel said it was the only way to ensure the stability of the single currency.
What persuaded eurozone countries and the IMF to lend Greece such a large sum was the fear that if Greece defaulted other countries like Portugal or even Spain could follow. Plenty of doubts remain, however.
The Greek economy will shrink by 4% this year and today's cuts could deepen the recession.
What the plan does do is to buy time and shelter Greece from the fierce winds of the markets.
The IMF is expected to approve its portion of the loan this week, IMF managing director Dominique Strauss-Kahn said.
In return for the financial support, the Greek government has unveiled a fresh round of sweeping efficiencies, including further tax rises and deeper cuts in pensions and public service pay.
The Eurogroup is trying to speed up rescue efforts for Greece amid fears its debt crisis could undermine other debt-laden states that use the single currency. Anxiety about contagion has focused on Portugal, Spain and the Republic of Ireland.
Germany has been the most reluctant to bail out Greece, but its Economy Minister Rainer Bruederle said there was a "good chance" of getting German parliamentary agreement by Friday.
Yet he said Greece had to implement its new austerity programme "quickly" and "to the letter".
'Evident' anger
The Greek economy is still deep in recession and on Sunday the government forecast that GDP would fall by 4% in 2010.
The country's national debt - currently at about 115% of GDP - would rise to 149% by 2013 before falling, it added.
It is not going to be easy on Greek citizens, despite the efforts that have been made and will continue to be made to protect the weakest in society
Mr Papandreou told a televised cabinet meeting that active and retired public sector workers would bear the brunt of the new wave of budget cuts.
"With our decision today our citizens will have to make great sacrifices," he said, describing public anger at the new wave of cutbacks as "evident".
"Our national red line is to avoid bankruptcy," Mr Papandreou said, adding that "no-one could have imagined" the size of the debt that the previous government, which left office last year, had left behind.
The austerity plan aims to achieve fresh budget cuts of 30bn euros over three years - with the goal of cutting Greece's public deficit to less than 3% of GDP by 2014. It currently stands at 13.6%.
Measures include:
Scrapping bonus payments for public sector workers
Capping annual holiday bonuses and axing them for higher earners
Banning increases in public sector salaries and pensions for at least three years
Increasing VAT from 21% to 23%
Raising taxes on fuel, alcohol and tobacco by 10%
Taxing illegal construction
Finance Minister George Papaconstantinou said Greece had been called on to make a "basic choice between collapse or salvation".
"It is not going to be easy on Greek citizens, despite the efforts that have been made and will continue to be made to protect the weakest in society."
New emergency legislation authorising the cuts and tax rises is now being drafted and is due to be put before parliament for approval by the end of the week.
However unions have vowed to fight the round of austerity measures. The third nationwide general strike in as many months is scheduled for Wednesday.
German Chancellor Angela Merkel said Greece's austerity plans were "very ambitious" and would spur other troubled eurozone members to do all they could to avoid the same fate.
"These countries can see that the path taken by Greece with the IMF is not an easy one. As a result they will do all they can to avoid this themselves," Mrs Merkel told the Bild am Sonntag newspaper.
One-Minute World News
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It is not going to be easy on Greek citizens, despite the efforts that have been made and will continue to be made to protect the weakest in society
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