By: Dr. Mike Campbell

You may be forgiven for thinking that when the IMF and EU decided that a bailout should be given to Greece last year to avoid the risk of Greece defaulting on its debts, that it was a done deal. However, the bailout was not a charitable act and must be repaid with interest. In contrast to a straight commercial loan, the EU/IMF facility had a number of strings attached, one of which was that the money would be released in tranches on the proviso that the Greek government made progress on financial reforms designed to resolve the nation’s debt problems over the longer term.

In return for the €110 billion bailout facility which was agreed in May 2010, the Greek authorities were required to cut €30 billion of expenditure over three years – naturally, biting austerity measures are hugely unpopular with the Greek people. However, the scope of the problem in Greece has turned out to be worse than originally thought (by a further 10.5% of GDP), as revealed in April of this year. Eurozone partners asked that Greece should cut even further to keep expenditure on track. The IMF will only agree to release further funding if it concludes that Greece will remain solvent for a further 12 months – the IMF is only allowed to loan funds if they can be repaid.

The Greek government is under fire and the Prime Minister has changed his finance minister; his government must survive a confidence vote today. The EU Eurozone finance ministers have postponed a decision on releasing the next tranche of payments until after additional austerity measures are put in place. It has also emerged that final details are being put in place for a second financial package to ensure that Greece can meet her obligations until 2014. It is clear that nobody wants to see a Greek default; the larger consequences of which would cause a financial earthquake in many private and state financial institutes which are exposed to Greek debt. The fear is that if Greece was to default on its loans, it would cause a domino effect in other highly indebted Eurozone nations, the consequences of which would be hard to calculate.