Europe is in crisis. Austerity measures have been announced in several countries including Greece and Spain, the euro is under pressure and stock markets across the globe have fallen sharply from their recent highs – and it is all due mainly to sovereign debt.

But what is sovereign debt and why has it caused a crisis? And should people in Britain be worried?

We have spoken to the experts to help answer these questions.

Q I keep hearing about sovereign debt. What is it?
National governments issue bonds as a way of borrowing to help meet their spending on education, health, defence and so on. Just like any bond, a sovereign debt bond pays investors interest over its term and the bondholder gets his money back on maturity. In Britain, these bonds are better known as gilts.

Andy Howse, investment director for fixed income at Fidelity, said: “The promise to repay is not a guarantee. The strength of the promise is a function of the size of the debt compared to the economy in question and the cost of servicing that debt. This can change over time and between nation states.”

Q What has caused the debt crisis?
In a word or two, over-borrowing. Sovereign debt is fine so long as the governments have no problem repaying the debt. But several countries have borrowed beyond their means – the ramifications of the financial crisis have left them struggling to repay their debt. This is why the IMF has agreed a financial package to bail them out.

“Greece and other countries will struggle to pay off these debts. This has led to a dramatic spike in borrowing costs for these countries, exacerbating the problems further,” Mr Howse added. “Investors have begun to question the future of European Economic and Monetary Union and whether the crisis may spread beyond the peripheral European countries.”

Q Which countries are affected?
Before last week the main countries that had been affected were Greece, Italy and Portugal. Last week it was the turn of Spain to announce austerity measures, while Ireland has problems too, although it is trying hard to cut its deficit.

Q Will it spread to Britain?
Only Rip van Winkel would be unaware that the UK also has a huge deficit, and so there are concerns that the crisis could spread to these shores. This was why the new coalition moved swiftly by announcing £6bn worth of cuts. This has assured investors, for the time being, that Britain will be able to reduce its deficit and repay gilt investors.

“We have more flexibility and it was very important for George Osborne to reassure global markets that our deficit is being tackled,” said Azad Zangana, European economist at Schroders.

Mr Howse agreed: “A weaker pound should boost the economy by making exports more competitive, and interest rates should remain very low for an extended period. But we can’t ignore this debt crisis in Europe because of the effect it may have on the level of global economic activity.”

Q Should I be worried?
The good news is that Britain has some advantages over the likes of Greece and Spain. The main one is that it does not belong to the euro and so is able to manipulate the pound to try to boost our economy via interest rates. “We can devalue our currency, which makes the borrowing cheaper. Greece can’t do that because it belongs to the euro,” said Mr Zangana.

But don’t get too complacent. Britain’s position is still precarious – £6bn worth of spending cuts won’t be enough to clear our £156bn deficit, and remember that our economy is reliant on its trade links to Europe. “The UK is in a relatively good position. It can set its own interest rates and has its own floating currency, which are important mechanisms for managing economic growth,” said Mr Howse.

“However, the UK is not insulated from debt problems and it is in our interest that the crisis is contained and managed by the EU, IMF and other central banks.”

Q How big an impact could the crisis have on the UK?
Half of all of Britain’s exports go to the Continent, so if Europe’s economy grinds to a halt we will feel the impact. Companies could struggle to increase sales, our economic recovery could hit the buffers and, ultimately, jobs could come under pressure.

Howard Archer, an economist at Investec, said: “There is increased pressure on Britain. The FTSE has been hit already, there are concerns of a double dip, and it’s bad news for exporters, which could have a knock-on effect of the wrong kind on our domestic economy.

“The June 22 Budget is key. If the measures don’t work there will be a loss of confidence in UK assets and that could store up other problems such as higher interest rates.”

Q What about my investments?
You won’t need reminding that every time a dark cloud hangs over our economy, or the economies of our trade partners, stock market investors run for the hills, causing share prices to fall. This is what has happened over the past fortnight or so – the FTSE100 has tumbled from 5,700 to under 5,000, although this week share prices recovered despite the eurozone crisis worsening.

But, again, don’t be complacent. Most experts agree that markets are likely to be jittery for a while yet.

Q Is there a danger of a second banking crisis?
This is something that the markets have been speculating over during the past few weeks. Greek, Spanish and Italian bonds are widely held by governments, banks and institutions worldwide and this is why bank shares have been particularly hit in the recent turbulence.

Mr Howse said: “Central banks and governments have learned tough lessons from the financial crisis of 2008/09 and are very unlikely to let these problems go so far as to break the global banking system.”

Q I bank with Santander. Should I move bank accounts?
Santander recently emphasised that its British operation is self-funding, raising cash from British savers to back loans to British borrowers, and does not require capital from its Spanish parent. Santander’s British subsidiaries are regulated by the Financial Services Authority and individual savers are protected by the Financial Services Compensation Scheme.

The FSCS, a statutory safety net, can pay out 100pc of the first £50,000 lost per saver per bank or building society. Up to 90pc of pension and life assurance savings are also protected by the FSCS safety net.

A Santander spokesman said: “Customers need not be worried as both Santander and Santander UK are strong businesses focused on retail banking with no exposure to toxic financial products. Our UK business is strong and has a standalone credit rating of AA.”

Q Will the crisis go on for much longer?
Most likely. The Greek bailout is over three years, which suggests there is no quick fix. “I think we will have a bumpy ride for a few years. There is a real sense of uncertainty on how this crisis will pan out,” said Mr Zangana.

Mr Archer added: “It is very, very fragile and the eurozone crisis is deep-seated and so will not disappear overnight. We need the bailout package to be implemented as soon as possible and for the affected countries to get their act together.”

Q I’m worried about losing money. What should I do?
Fund managers will talk about market blips throwing up buying opportunities while economists will make predictions that are wrong as often as they are right. It comes down to your attitude to risk and your financial goals.

It’s your money and if you are of nervous disposition then invest in safe assets. The safest is cash, of course. Interest rates are low but ask yourself whether you would rather make 2pc or risk losing 10pc.

Review any investments and ensure that your portfolio is diversified for damage limitation reasons if markets implode.