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Q&A: Default still on the cards, despite vote for austerity

What was the vote about?

The European Union and International Monetary Fund, which are keeping Greece afloat with loans, demanded that the government impose €28bn of tax rises, privatisation measures and cuts to show that the Greeks were serious about reforming an economy dragged down by lack of competitiveness and a huge state sector dogged by corruption. The message was 'do it, or else' from the EU paymasters, whose handouts are vital.

An emergency meeting on Sunday will sign off the next €12bn instalment, the fifth, of a €110bn EU-IMF bailout agreed last year. This cash injection will stop Greece going bankrupt on July 15 and defaulting on its €350bn debt.

Phew, so it's all ok then, crisis averted?

For now. Over the next two weeks the EU must come up with a second Greek bailout which could be as high as €120bn on top of the €110bn in rescue loans agreed for Greece in May 2010. Unless it does, then the IMF will not give the green light to another bailout instalment, the sixth, in September and the crisis will flare up again.

So the euro is not saved yet?

No. There is a growing clamour from economists, politicians and others that the only realistic option for Greece is a negotiated default in order to let austerity and economic restructuring work.

Currently, the Greek government is battling protesters and a growing opposition to austerity, especially tax rises, just to service its debts, which are mainly held by European banks. The continued instability threatens to pull Ireland and Portugal, already under EU-IMF bailout "programmes", into the crisis, a development that could start a run on Spanish, Belgian and French bonds. No one really believes that the euro, a single currency that binds productive Germany to debt laden Greece, can carry on with "business as usual".

So will the Greek bailout Mark II finally sort things out?

It's very tricky. New loans are deeply unpopular in creditor countries, like Germany, and the savage austerity demanded of the Greeks is fuelling growing social conflict. So this will be difficult to sustain politically. It's not only a political "double or quits".

By piling more loans on an economically weak and chaotic Greece, the debt burden might become all too much, leading to a greater default risk with even more exposure for the French, German and European banks that hold the Greek government bonds.

Irish Independent