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The leaders of Italy, France and Germany met this week in Brussels to work on solutions to Europe's debt crisis.

NEW YORK (CNNMoney) -- After wreaking havoc in global financial markets last year, the debt crisis in Europe has entered a complicated new phase in 2012.

There have been signs of progress in Italy and Spain, thanks to the efforts of new governments in both countries and aggressive moves by the European Central Bank.

But the outlook for Greece remains uncertain, with key issues surrounding additional bailout funds and a writedown of the nation's debts still unresolved.

And Portugal has come under pressure amid speculation that the bailed-out nation could be next on the default watch list if Greece negotiates a restructuring.

Greece

Europe's debt problems started in Greece more than two years ago, and the situation there has yet to be fully resolved.

Greece is close to finalizing a deal with private sector creditors to write down a portion of the nation's overwhelming debt load, Prime Minister Lucas Papademos said Tuesday.

The agreement, which has been held up for weeks amid disagreements over how much of a loss investors will voluntarily accept, is a key condition for Greece to receive more bailout money.

Beyond the private sector talks, Greece is also negotiating the terms of a second bailout package with the EU, IMF and ECB. EU leaders agreed in October to a €130 billion rescue, but there are signs Greece may need up to €145 billion given its deteriorating economy.

Greece has struggled to meet the conditions of its bailout loans in the past and some euro area nations remain reluctant to provide more funds without assurances.

Germany, the richest eurozone economy, has proposed giving EU authorities veto power over Greek budget policies as a condition of more bailout money. Greece rejected the proposal as an infringement of national sovereignty, and other EU officials have ruled it out.

The risk is that Greece will miss a €14.5 billion bond redemption in March without more bailout money. That could lead to a disorderly default, a development that would have severe and unknowable consequences for the global financial system.

The lack of clarity on the debt reduction and bailout talks have raised calls for Greece's creditors in the "official sector" to provide some relief. The ECB, which holds an estimated €30 billion to €45 billion in Greek debt, is under pressure to forego profits on those bonds, as are individual euro area central banks.

EU leaders on Monday called for a resolution to these issues "in the coming days" so that the private sector deal can be implemented by mid-February.

Meanwhile, investors have been growing worried that Portugal could be the next to face a default. Portugal's borrowing costs have spiked to record highs since the government's credit rating was cut to speculative grade by Standard & Poor's on Jan. 13.

Fiscal compact

EU leaders representing 25 members of the 27-nation group have agreed to sign a pact designed to increase fiscal discipline and strengthen political ties.

The terms of the pact include, among other things, a legally-binding balanced budget requirement with an "automatic correction mechanism," and a provision to make fiscal policies of individual governments subject to EU authority "ex ante," or before the fact.

The 25 leaders hope to sign the pact at the next EU summit in March. But analysts say finalizing the new rules, which will require parliamentary approval in many cases, could take months if not years.

The goal is to help prevent a future crisis by ensuring that governments do not spend beyond their means and rack up unsustainable debts.

The pact represents a step toward a so-called fiscal union, which economists say is necessary for the long-term stability of the euro currency. But critics say the agreement does not address the immediate challenges in the eurozone.

Firewall

To deal with the immediate challenges, EU leaders backed a plan this week to implement the European Stability Mechanism in July.

The €500 billion ESM, which was originally set to come into force next year, is a permanent bailout fund for euro area governments. It will replace the temporary European Financial Stability Facility, which is effectively maxed out and set to be phased out next year.

EU leaders expect finance ministers to make the plan official at the next Eurogroup meeting in February.

The aim is to restore confidence in global financial markets about the financing of troubled member states such as Italy and Spain.

Borrowing costs for Italy and Spain have come down and both nations have enjoyed solid demand for short-term bonds this year. The improvement in Italian and Spanish bond markets coincided with aggressive moves by the European Central Bank, which poured nearly €500 billion into the banking system in December.

The ECB has also relaxed its collateral requirements and is set to offer more long-term loans in February, when banks are expected to borrow up to €1 trillion.

The unprecedented lending program is designed to prevent a deeper credit crunch in the banking system. Many European banks have struggled to secure funding from private sources amid concerns about their exposure to bad sovereign debt.

But analysts say the ECB's lending program may also be supporting demand for government bonds.

Shaky economy

The latest phase of the debt crisis is playing out against a backdrop of declining economic activity across the eurozone.

The IMF expects the 17-nation region to suffer a mild recession this year as government cutbacks take a toll on growth. The dour outlook sets up a difficult balancing act for officials as they struggle to revive growth and reduce debt at the same time.

EU officials have proposed measures to boost employment, support spending on infrastructure projects and help small businesses grow. But most governments have little room in their budgets to stimulate economic activity.

Economists say the weak economic backdrop raises the risk that a policy "accident" could drive another bout of volatility in financial markets.

The unemployment rate among young people in the eurozone stands at 22% in December, according to data published Tuesday by EU statisticians.

In crisis-hit Greece, youth unemployment is a whopping 47%, while nearly 49% of young people in Spain are out of work.

The exceptionally high levels of youth unemployment have raised concerns that additional austerity measures could give rise to social unrest.