ed out not to be the case, the cost of borrowing for many of the smaller EU states, some of which are already struggling to service their debt

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ed out not to be the case, the cost of borrowing for many of the smaller EU states, some of which are already struggling to service their debt

Post by AjayBaji on Fri Jul 22, 2011 1:04 am

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bn euros ($156bn; £97bn), the scale of the crisis means that European leaders are trying to work out the details of a second bail-out.

This second major package of loans, expected to be worth around the same as the first, will be the subject of an emergency summit in Brussels this week.

Why is Greece in trouble?

Greece has been living beyond its means in recent years, and its rising level of debt has placed a huge strain on the country's economy.

The Greek government borrowed heavily and went on something of a spending spree after it adopted the euro.

Public spending soared and public sector wages practically doubled in the past decade.

However, as the money flowed out of the government's coffers, tax income was hit because of widespread tax evasion.

When the global financial downturn hit, Greece was ill-prepared to cope.

It was given 110bn euros of bail-out loans to help it get through the crisis.

Why did Greece need another bail out so soon?

Greece received that original bail-out in May 2010.

The reason it had to be bailed out was that it had become too expensive for it to borrow money commercially.

It had debts that needed to be paid and as it couldn't afford to borrow money from financial markets to pay them, it turned to the European Union and the International Monetary Fund.

The idea was to give Greece time to sort out its economy so that the cost for it to borrow money commercially would come down.

That has not yet happened. Indeed, the ratings agency S&P recently decided that Greece was the least credit-worthy country it monitors.

As a result, Greece has lots of debts that need to be paid, but it cannot afford to borrow commercially and does not have enough money from the first bail-out to pay them.

Why can't Greece just default on its debts?

If Greece were not a member of the eurozone, it might be tempted just to default on its debts, which would mean either declining to make interest payments or insisting that creditors agree to accept lower payments and write off some of the debt.

In the case of Greece, that would present enormous difficulties.

The rates of interest that eurozone governments have to pay have been kept low by the assumption that the European Union and the European Central Bank would provide assistance to eurozone countries to stop them defaulting.

If that turned out not to be the case, the cost of borrowing for many of the smaller EU states, some of which are already struggling to service their debts, would rise significantly.

It means that if Greece were to default, the Irish Republic and Portugal might have to default as well.

A default would also be bad news for the banks that have loaned large amounts of money to the governments of Portugal, the Irish Republic and Greece.

If all of those banks got into trouble, it would seriousl

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Re: ed out not to be the case, the cost of borrowing for many of the smaller EU states, some of which are already struggling to service their debt

Post by AjayBaji on Fri Jul 22, 2011 3:44 am

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ver, since a Greek default would have such a big knock-on effect for other troubled European economies, it would exacerbate the UK's exposure to Irish debt, which is rather larger.

The UK's direct contribution to any Greek bail-out is limited to its participation as an IMF member. But the indirect effect of a Greek default on the UK would be incalculable.

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