The Greek debt crisis hit a critical juncture over the weekend. An official with the International Monetary Fund (IMF) said the IMF may withhold the next round of funding scheduled for June 29th unless the European Union agrees to guarantee GreeceÃ¢â‚¬â„¢s budget needs for the coming year. Sources familiar with the details said that EU officials met with the Greek government during the weekend to find ways to ensure that sufficient funding would be available to fund basic government operations for the next two years.
To add to the difficulties facing the government, the main opposition party served notice that they will only support the required spending if the government agrees to offer substantial across-the-board tax savings to the taxpayers. The government responded to the demand by noting that cutting taxes would reduce revenues thereby forcing the government to reduce spending on social programs to make up the revenue shortfall.
It was just over a year ago that Greece received its initial bailout package. The deal saw 110 billion euros ($158 billion) supplied by the EU and IMF with a requirement for Greece to implement a so-called austerity program to reduce the deficit. Greece has fallen considerably short on this constraint and several EU members are now arguing that Greece should not receive new funding until all conditions are met. Opposition to further cash outlays to Greece is particularly strong in Germany, Finland, and the Netherlands.
In addition to further cash payments, the idea of restructuring GreeceÃ¢â‚¬â„¢s debt was also noted last week as a possible option. Jean-Claude Juncker, head of the Eurogroup of Finance Ministers, said that some form of debt restructuring was inevitable and that he personally favored the idea of debt Ã¢â‚¬Å“re-profilingÃ¢â‚¬Â. Market reactions was, to say the least, heated.
Re-profiling GreeceÃ¢â‚¬â„¢s debt as envisioned by Juncker would be a Ã¢â‚¬Å“softÃ¢â‚¬Â restructuring delaying payment to those creditors willing to wait beyond the original maturity date for reimbursement. This trial balloon proved controversial, however, and European Central Bank board member Lorenzo Bini Smaghi today dismissed the idea as nothing more than a Ã¢â‚¬Å“fairytaleÃ¢â‚¬Â. Smaghi said that there is no way any form of debt restructuring could be conducted in an orderly fashion without panicking the market.
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