Greece faces a new odyssey as it attempts to avoid defaulting on its debts

But never before has the myth, as told in Homer's Odyssey, preyed so heavily on the mind of Greek prime minister George Papandreou as his country faces a journey of equally epic proportions back to financial health.

While European leaders, the European Central Bank and the International Monetary Fund are this weekend expected to sign a long-anticipated multi-billion-euro rescue package for Greece, Papandreou knows that his problems are far from over.

He is likely to draw comfort from Odysseus's mythical travails as he sets about repairing the ever-widening hole in Greece's finances, which threatens to spill over into the rest of Europe – causing what some economists have likened to a "second Lehman Brothers" crisis.

Although an agreement between EU leaders – notably German chancellor Angela Merkel, IMF head Dominique Strauss-Kahn and ECB president Jean-Claude Trichet – will act as a temporary sticking plaster to Greece's problems, economists warn that a second financial crisis continues to hang over Europe like the sword of Damocles.

Even as UK politicians enter the final furlong before the general election, Greece and the potential consequences for both the UK economy and UK banks are never far from their minds.

Although a bail-out is expected to give bond and foreign currency markets a temporary boost when they open this week, analysts say any optimism is likely to be short-lived.

As Charles Stanley analyst Jeremy Batstone-Carr warns: "The sovereign debt crisis cannot possibly be said to have gone away."

Like Dionysus, the Greek god of wine renowned for his hedonistic orgies, Greece stands accused of living well beyond its means for years. While this can also be said of other European countries, European Commission figures show that in the case of Athens the party has been particularly lively.

The music could potentially have continued to play had the global economic downturn not taken hold of the eurozone. But as Greece struggled to keep its head above the water during the financial crisis of 2008-09, concerns mounted about its burgeoning debt, which now stands at over 115 per cent of its national income. With no sign of economic recovery in sight, lenders on the international bond markets who are fearful of a potential default have demanded ever higher interest rates.

Although the unfolding Greek tragedy has been on the international radar for several months, the crisis took a critical turn for the worse last week when one of the credit rating agencies, Standard & Poor's, downgraded the value of Greek government debt to "junk" status. To add insult to injury, another agency, Moody's, cut its rating on the debt and deposits of nine Greek banks on Friday.

The downgrades could not have come at a worse time for Papandreou's government as it continued to hold frenzied talks with the ECB, the IMF and the German government about a bail-out package.

An ?8.5 billion tranche of Greek debt is payable on 19 May, and with interest rates at sky-high levels, Athens has been forced to admit that it won't meet repayments.

Negotiations with Merkel's government have been particularly strained as German ministers have sought to delay signing any bail-out until after regional elections in Germany on 9 May. The prospect of signing a cheque for at least ?8.4bn – Germany's estimated share of the package – has been unpopular with the German electorate.

But as Greece's credit rating was thrown into the junkyard on Tuesday, Germany and other European countries received a stark reminder of what other trouble lies ahead if Greece is allowed to fail. On the same day, Portugal saw its debt rating downgraded two notches to A-.

Although the Portuguese economy is a relative minnow in eurozone terms, the downgrade was enough to send the markets into freefall as lenders began to fear a second credit crunch – only this time fuelled by a sovereign debt crisis.

When, in the closing two minutes of trading on Wednesday evening, Spain's rating was reduced from AA+ to AA, dark jokes about how Europe is facing "Acropolis Now" spread across trading desks.

At four times the size of the Greek economy, the suggestion that Spain is also plummeting head-first into economic Armageddon injected a fresh urgency to talks in Europe.

While the eurozone is in the most immediate line of fire, Britain was also reminded that it would come under heavy attack were a crisis in Europe allowed to take hold.

IMF chief Strauss-Kahn warned on Wednesday that the Greek crisis could trigger an economic "contagion" that will leave few prisoners as lenders lose confidence in European government bonds.

As David Wyss, chief economist at Standard & Poor's, said: "If people get scared that Greece could default, they are going to be scared that Portugal will default and then other countries. Once people panic, they panic about everything. We saw that in the wake of the Lehman Brothers failure."

UK politicians on the campaign trail were also reminded that while Britain's economic situation is by no means as desperate as that of Greece – Britain has, after all, already exited recession while Greece remains stuck in the mire – the UK too is running a deficit well above the 3 per cent of GDP target set by the European Union.

Britain's budget deficit as a percentage of GDP is expected to reach 12.6 per cent this year, compared with 13.6 per cent in Greece. UK debt is running at 68.1 per cent of national income, higher than in Spain where debt is 53.2 per cent of GDP.

Chancellor Alistair Darling has long been batting off concerns about a potential downgrade to Britain's credit rating. Until the general election has passed, the rating agencies are expected to give the UK the benefit of the doubt.

But economists insist that the next Chancellor cannot afford to be so complacent. He will have to set out a convincing and honest plan to reduce Britain's debt or the UK too will find itself under the "Eye of Sauron".

As Jonathan Loynes of Capital Economics says: "If that doesn't happen, there is a danger that the market will start to view the UK as similar."

According to the Bank for International Settlements (BIS), UK banks also have a sizeable exposure to troubled European economies. BIS estimates that the combined exposure of UK banks to Greece and Portugal sits at around 25bn.

Although this is relatively modest compared with other European financial institutions – the French banks are exposed to Greece alone to the tune of ?75bn – economists warn that UK banks could be in even more serious trouble if the Spanish economy were to take a turn for the worse, with exposure of at least 75bn.

Confidence in the Spanish economy hit fresh lows on Friday when it was revealed that its jobless rate surpassed 20 per cent for the first time since 1997.

Although a Greek bail-out package will ease short-term concerns about the eurozone, economists warn that the crisis is far from over. And all eyes will be fixed firmly on Madrid over the next couple of months.

"The problem is that if people see Greece being bailed out, other indebted countries will think about going cap in hand to the European Central Bank or the International Monetary Fund for finance," says Batstone-Carr. "And frankly the IMF doesn't have the wonga. Spain is really the line in the sand. If Spain goes, this really is a big problem."

Batstone-Carr warns that even in Greece's case, there is still considerable risk of default. Although a bail-out buys Papandreou's government extra time, he estimates that Greece will be forced to negotiate a complicated and painful restructuring of its debts with lenders – as Mexico did in the 1980s and Argentina in 2001.

"The problem with a debt restructuring is it requires agreement on the part of all lenders," he adds.

Most analysts dismiss predictions that the eurozone is facing imminent break-up, given that countries such as Greece and Portugal would have to pay more to service their euro-denominated debts if they reverted to their original currencies. But many fear that civil unrest, particularly in the Mediterranean, is an increasingly likely outcome.

As the Greek government came under pressure this weekend to commit to plans to cut its deficit by ?24bnby the end of 2011, Greek unions and newspapers were already sending strong signals that proposed salary cuts, pensions reform, VAT and duty hikes, and public sector job losses would be strongly opposed.

As Greek daily newspaper Eleftheros Typos summed it up: "Armageddon is coming. The lenders are setting the terms, and they are incredibly tough. At least for three years they will drink our blood. And this is not an exaggeration."