International financial markets took started to react to the prospect of a default on Greek sovereign debt with the FTSE 100 and other major European markets opening down 1%.
The IMF, who are due to make their next aid payment to Greece this month, added the condition that they would only do so if the EU could ensure that Greece could pay its bills for the next year. Because of the state of Greek finances, this condition could not be met with any certainty without a second bailout.
Germany, the major economic force within the EU, were holding up the second bailout insisting that part restructuring ‘pain’ must be felt by private Greek bond (governments issue bonds in order to raise funds for debt). This issue was resolved by the EU and the IMF are now satisfied to make their payment. However, a new condition imposed on Greece for the second bailout is that the government can pass a new series of austerity measures. This latest condition has been the cause for the latest market uncertainty.
Greece has already experienced a huge amount of public service cuts in order to satisfy the terms of the first bailout and the Greek public is not particularly enthused about the idea of more. This week has seen a number of protests and riots in Athens at the prospect of having to live with another set of public sector cuts.
After offering to resign, the Greek Prime Minister, George Papandreou, is trying to put together a cross party coalition government in order pass a new set of austerity measures and ensure the second bailout. But this has not been straightforward and negotiations with the conservative New Democratic Party have produced little consensus on a new set of cuts. Even members of Papandreou’s own Socialist Party are defecting at the current strategy of government sparking fears that Greece will be the first advanced economy in 60 years to default on sovereign debt.
If Greece were to default on their debt, the European Central Bank are warning that it could have contagion effect across the EU, with Greek banks failing and other major European banks taking heavy losses. The need of a second Greek bailout package could also raise uncertainty over the long term effectiveness of other bailouts in Ireland and Portugal.
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