Too much spending and borrowing in the boom times. Some corruption and falsifying of statistics too. The recession has compounded matters by reducing tax income. Greece suffers a combination of a high budget deficit - difference between government spending and tax revenues per year - and a high overall debt in proportion to GDP. The UK has nearly as big a deficit percentage, but less overall debt; Italy has similar overall debt but a much smaller deficit (so that debt, while high, increases less rapidly). The exact nature of the debt also matters - a lot of Greece's matures soon, requiring new loans to be taken out to pay off old ones ('refinancing'), and those new loans are being offered at much higher rates. (I don't know, but I presume those rates remain constant for the duration of the loan - meaning Greece could have massive debt repayments like a millstone round its neck for years to come)
The big hit is perhaps the downgrading of credit status. Which brings me to another matter - the role played by the big credit ratings agencies. Standard and Poor, Moody's, Fitch seem to be the big three. They are all US-based. They give ratings, which then affect the market - consequently, they can have a big impact. Greece's problems are being compounded by the reduction in credit status - had that reduction not happened, we might not be having to bail them out so much. In extremis, the fear is a country getting driven into a death spiral - downgraded credit results in more expensive borrowing, resulting in worse deficit, resulting in further credit downgrading, etc etc ultimately ending in bankruptcy. Are these agencies sufficiently accountable, and given the economic crises perhaps stemmed from their mistakes (rating as very safe products that turned out to default), should they still be held in as high regard as they were?
My real concern is, when are the bailouts going to end? First we bailed out the banks, then the US bailed out General Motors, now the EU and IMF are bailing out a whole country. It seems like we're propping up an economy that wants to fall. The UK may have returned to growth, but is it sustainable?
Of course the consequences of a Greek bankruptcy would be far reaching. It wouldn't just hit Greece - investors and ratings agencies would start to feel uneasy about other national debt also. Portugal is already of concern. The UK's high deficit could make investors uneasy, especially if the expected hung Parliament results in a weak government that doesn't take action to reduce it and then Parliament is dissolved in autumn or winter. (And of course another election could just produce another hung Parliament).
Also, I believe it was an Ancient Greek (forgot who) who said that democracy is doomed to fall, since citizens will realise they can vote themselves gifts from the state purse, and will in due course squander all the gold and be left in poverty. Overborrowing and deficit spending would seem to be a modern variant on this.