A spectacular production has been in the making over the past years. Emotions and drama? There's plenty of it here. Copious amounts of fear and greed too.

 Although the stage is set mainly in Europe, this opera boasts an international cast of actors whose characters develop in interesting, sometimes unpredictable ways. 

 The orchestra is infamous for playing dark, ominous tunes that spook its global audiences as they nervously follow the story's every twist and turn, plot and sub-plot.

 Behind the scenes, there are conductors, heroes and even possible phantoms.

 Welcome to the melodrama. Welcome to the sovereign debt crisis opera.

 ACT ONE: SYNNOPSIS AND STORY SO FAR

 Some call it a new episode of an old story.

 The libretto can be traced back to the fact that when governments need to raise money to run their country, they issue bonds to creditors such as banks, institutions, funds and private investors.

 Compared to "risky" shares whose value fluctuates with the performance of the company, government-backed bonds are considered a safe investment. The more likely a government is to repay investors, the lower the interest rate it pays to raise money.

 But if creditors fear a default, interest rates on bonds, or yields, skyrocket as markets try to recover as much of their loan as possible. As yields approach the 7 percent mark, investors dump their bonds. Simply put, at that point, there is no confidence that the debt will ever be repaid.

 

Not to forget the influence of the oligopoly of ratings agencies that determines the credit worthiness of countries, companies and institutions. Economic analysts often speak of their "self-fulfilling prophecy." This means if they downgrade a country's credit rating, markets further punish the government with high bond yields, making it tougher for them to raise money and make their way out of a crisis.

 "The role of credit rating agencies can potentially aggravate problems," Fabian Zuleeg, an expert at the European Policy Center, told Xinhua.

 Curiously, rating agencies failed to downgrade banks and other financial institutions that handed out easy housing loans in the U.S. without running credit checks. This led to the sub-prime mortgage crisis and triggered the global financial meltdown in 2008.

 "Global challenges and imbalances remain which means the European Union and the United States have to become more sustainable -- economically, socially and in terms of debt," Zuleeg said.

 But who takes a hit when governments default on their debt? Former Austrian Finance Minister Josef Proll famously said, "You cannot leave the profits with the banks and make the taxpayer shoulder the losses."

 More on that later. For now, sit tight. The curtains are about to rise...

ACT TWO: ENTER THE LEAD ACTORS AND PRIMA DONNA

 The honor of singing the aria goes to Greece. After a failed attempt in 1999, Greece was admitted into the eurozone in 2001 despite its relatively weak economy.

 The strict membership conditions for joining the European single currency, the so-called Maastricht criteria, were relaxed by Brussels. Perhaps, a display of leniency to encourage other aspiring countries and promote the grand euro project.

 Even as the ancient drachma was laid to rest, the then-president of the European Central Bank Wim Duisenberg flagged up the fact that Greece had miles to go in curbing inflation and reigning in public sector borrowing. The series of events that ensued proved the warning fell on deaf ears.

 

Joining the eurozone meant cheap money for Greece. And they borrowed lots of it to host the 2004 Olympics, build a metro network for Athens and pay generous pensions to its workers, among other things. At a time of low growth, Greece eventually accumulated high mountains of debt. Analysts put the figure at 170 percent of its gross domestic product (GDP).

 When it could not repay, the cavalry was called in. The task of helping out the poorer economies in the periphery of the eurozone fell on richer core countries such as the Netherlands, Finland and last but not least Germany, Europe's star economic performer.

 It quickly became apparent that our prima donna, Chancellor Angela Merkel, held the purse strings to any European bailout. The German parliament agreed to help Greece, but not before demanding severe austerity measures to reform its financial systems. Enter, the European Central Bank and the International Monetary Fund with a package of 110 billion euros (156 billion U.S. dollars) in May 2010.

 What followed was a domino effect. Our opera's costars Ireland and Portugal created more panic among the audience -- in this case, investors around the world -- when they also required rescue packages. Spain remains in a precarious position and, most recently, the credit worthiness of Italy, Europe's third largest economy, was called into question.

 "The ill-judged public dispute between the Italian Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti sparked speculation and doubts about the coherence of the government," said Iain Begg, professor at the London School of Economics.

 Although Italy's debt to GDP ratio is high at 120 percent, Begg felt the country was unfairly punished by nervous markets with 10-year bonds yields of 6 percent, the most since the euro's debut in 1999. "Unemployment has not risen dramatically and Italy's conservative banking system does not appear to be subject to the same sort of toxic debts as elsewhere. Also, a sizeable share of Italian debt is held by Italians, rather than foreigners," he added.

 In the case of Greek debt, however, German and French banks are most exposed which adds a complex political dimension to the issue. The show seems to be driven by those who are greedy and those who are fearful.

 But who is who? We'll find out in act three...

 ACT THREE: CONCERT MASTERS AND PHANTOMS

 In the pit of the opera, our musical ensemble of ratings agencies and banks continues to play sorrowful tunes that depress. After all, the private sector has bought sovereign debt and does not want to lose any money if governments default. Perfectly understandable.

 However, with a default by Greece seeming increasingly unavoidable, there is a growing call from those such as Germany for banks and private investors to bear some losses. In fact, Chancellor Merkel has made private sector involvement a precondition for any future debt reprofiling in the eurozone.

 

Some experts agree it's high time greedy banks are taught a lesson. "There is an inherent risk in giving loans, be it to a country or a company. If there is no pain for lenders when a loan goes bad, there is a significant moral hazard which ensues, resulting in the banks lending with abandon knowing there is little risk in doing so," hedge fund analyst Rajesh Kannan told Xinhua.

 "The U.S. blundered by bailing out their banks with no strings attached, resulting in exponential banking profits at the taxpayers' expense with no job creation. Europe need not and should not repeat this mistake," he added.

 Not true, says Daniel Gros from the Center for European Policy Studies, who like the European Central Bank, questions what good inflicting losses on private banks will achieve.

 "In the euro area, while only some countries have fiscal problems, the banking system is too fragile to take on sovereign default without major problems," he told Xinhua.

 The EU's current endeavor, and challenge, is to orchestrate a "voluntary" restructuring of debt to avoid default and, along with it, contagion that can quickly affect other euro economies.

 Here is where the big three credit rating agencies, Standard and Poor's, Fitch and Moody's, are making life difficult for EU leaders. When they downgraded the credit worthiness of countries such as Greece and Portugal to junk status, international investors lost faith in their bonds, resulting in unsustainable high yields.

 While many European bureaucrats have cast aspersions on ratings agencies and their seemingly murky methods of operating, Benedicta Marzinotto from the Brussels European and Global Laboratory feels our opera's phantoms are certainly not entirely to blame for the current mess. The lack of political will is also taking its toll.

 "The governments of Europe have lacked the decisive action and proceeded from one compromise to another. No one has given up interests they were representing and taken responsibility for the consequence of their decision," he said.

 As if all this drama was not enough, investors are also worried by a bad moon rising across the Atlantic. In Washington, democrats and republicans are playing a dangerous game of who blinks first as US President Barack Obama has till August 2 to raise the government's debt-ceiling currently set at 14.2 trillion U.S. dollars.

 Investors will hope, like Winston Churchill once said, that the U.S. will eventually do the right thing after exhausting every other option.

 This brings us to the crescendo of the opera. It will have you on the edge of your seats.

 ACT FOUR: THE GRAND FINALE

 Back in Brussels, European Union leaders are preparing to deal with an unwanted encore from Greece, the need for a second bailout fund. On Thursday, they will meet at a special summit to hopefully agree on and hammer out details of a 125 billion euro (177 billion U.S. dollars) package.

 Financial markets, on the other hand, have been turbulent in the past week. Stocks fell as 8 out of 90 Europeans banks failed a continent-wide stress test, with another 16 said to be on the borderline. The financial health checks did not take into account a possible default by Greece which did little to soothe investor sentiment. Resultantly, the euro touched record lows and gold prices hit record highs of 1,600 U.S. dollars an ounce.

 Most analysts point to two likely scenarios: either Greece is allowed to temporarily exit the eurozone, devalue its currency and strengthen its finances, or an advanced integrated fiscal union is embraced where all outstanding Greek payments is absorbed into a larger pot of EU-backed debt.

 Any other solution, they feel, would only be a stopgap measure. Europe would be simply kicking the can down the road or, worse still, rolling a snowball down a hill.

 European Commission President Jose Manuel Barroso admitted the situation was serious and that without a decisive response, negative consequences would be felt in all corners of Europe and beyond.

 "The euro is one of our greatest assets. Its benefits far outweigh the effort that is required by member states on the different sides of the negotiation," he said in a statement prior to the summit.

 "In a globalized world, either we act as Europe, or we are not actors at all," he added.

 Act Europe must. Because if it does not, for the single-currency eurozone as it stands today, it may well be curtains. (Bai Yu & Vanessa Liberson in Brussels contributed to this report)

 Xinhua