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Published on June 21st, 2011 | by Henna Butt
Image © The financial turmoil in Greece shows no sign of coming to an end as this week as the International Monetary Fund (IMF) and EU are forced to provide a second bail-out for the country. Greece's total debt is expected to hit 160 per cent of gross domestic product (GDP) by the end of the year. According to Edmund Conway of the Telegraph, a country is thought to be in real danger if debt reaches anywhere near 100 per cent of GDP. Demonstrators in the streets of Athens are opposing austerity measures being pushed through by the Greek Prime Minister, George Papandeou. In a bid to implement the increased tax and decreased spending that have been demanded by the EU; the Prime Minister has appointed a new finance minister this week. This comes as part of a reshuffle of the cabinet that the Prime Minister will put to a vote of confidence in parliament next week. Whilst Berlin has been opposed to a second bail-out, Germany was forced to bow to pressure from the IMF to agree to come to the aid of Greece. The acting chief of the IMF, John Lipskey, expressed in no uncertain terms that if Germany failed to support a bail-out the IMF would allow Greece to default on its loans. Germany wants to see greater sacrifice from the bank, meaning a renewal of debt on favourable terms for Greece. However, France and the ECB warn that this will be seen as a default and lead to more obstacles to Greece being able to borrow commercially again. Greece received its original bail-out in May 2010, when it became too expensive for the country to borrow commercially. This initial EU aid was given in order to provide Greece with time until it became affordable for the country to borrow commercially again. However this has not yet occurred, the credit agency S&P recently stated that Greece is the least credit-worthy country that they monitor – this included the world's developing countries. If Greece were to default on its debts the repercussions would be very negative for financial recovery in the eurozone. The eurozone countries pay a lower rate of interest on their debts because the EU and the European Central Bank (ECB) has agreed to provide assistance to eurozone countries in times when their economies are weak in order to prevent them from defaulting. Thus if Greece were to default and interest on debts went up then Ireland and Portugal – who have also received bail-outs – may need to default as well. This would culminate in losses for the banks which have participated in bail-outs for all three countries. This in turn would affect the ECB which has loaned to those banks. This second bail-out shows no signs of addressing the issues at the heart of Greece's financial difficulties. It will be notoriously difficult for the Greek government to implement austerity measures. Rather the bail-out will provide some time for European leaders to find a more long-term solution to Greece in the context of the eurozone.

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Another bail-out for Greece – a long-term solution?

The financial turmoil in Greece shows no sign of coming to an end as this week as the International Monetary Fund (IMF) and EU are forced to provide a second bail-out for the country. Greece’s total debt is expected to hit 160 per cent of gross domestic product (GDP) by the end of the year. According to Edmund Conway of the Telegraph, a country is thought to be in real danger if debt reaches anywhere near 100 per cent of GDP.

Demonstrators in the streets of Athens are opposing austerity measures being pushed through by the Greek Prime Minister, George Papandeou. In a bid to implement the increased tax and decreased spending that have been demanded by the EU; the Prime Minister has appointed a new finance minister this week. This comes as part of a reshuffle of the cabinet that the Prime Minister will put to a vote of confidence in parliament next week.

Whilst Berlin has been opposed to a second bail-out, Germany was forced to bow to pressure from the IMF to agree to come to the aid of Greece. The acting chief of the IMF, John Lipskey, expressed in no uncertain terms that if Germany failed to support a bail-out the IMF would allow Greece to default on its loans.

Germany wants to see greater sacrifice from the bank, meaning a renewal of debt on favourable terms for Greece. However, France and the ECB warn that this will be seen as a default and lead to more obstacles to Greece being able to borrow commercially again.

Greece received its original bail-out in May 2010, when it became too expensive for the country to borrow commercially. This initial EU aid was given in order to provide Greece with time until it became affordable for the country to borrow commercially again. However this has not yet occurred, the credit agency S&P recently stated that Greece is the least credit-worthy country that they monitor – this included the world’s developing countries.

If Greece were to default on its debts the repercussions would be very negative for financial recovery in the eurozone. The eurozone countries pay a lower rate of interest on their debts because the EU and the European Central Bank (ECB) has agreed to provide assistance to eurozone countries in times when their economies are weak in order to prevent them from defaulting. Thus if Greece were to default and interest on debts went up then Ireland and Portugal – who have also received bail-outs – may need to default as well. This would culminate in losses for the banks which have participated in bail-outs for all three countries. This in turn would affect the ECB which has loaned to those banks.

This second bail-out shows no signs of addressing the issues at the heart of Greece’s financial difficulties. It will be notoriously difficult for the Greek government to implement austerity measures. Rather the bail-out will provide some time for European leaders to find a more long-term solution to Greece in the context of the eurozone.

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