A highly unpalatable austerity package that is being thrust on Greece has spawned political turmoil in that country. Even a major cabinet reshuffle is not expected to temper the opposition to the austerity measures that prospective lenders insist Greece must adopt to qualify for a bailout package. If it eventually goes through, the reprieve will be the second in just over a year. Last year, when the debt crisis flared up, European lenders, hoping to contain it at the Greek border, provided a bailout worth $158 billion over three years, a significant portion coming from other euro area countries and the balance from the International Monetary Fund. However, since then the debt crisis has spread relentlessly across the southern and western periphery of the euro area. Today the crisis is viewed not just as the problem of a few laggard countries in the euro area but one that can threaten the foundations of the European Monetary Union and even have a negative impact on the global economy. Along with high levels of public debt in the advanced countries and escalating oil prices, it ranks among the significant threats to global economic revival. The IMF has estimated a one per cent drop in global output if the crisis in Europe persists. Even assuming that the Greek Parliament accepts the austerity package, there would still be daunting challenges in its implementation.

A very large portion of the Greek government debt is held by private investors. European banks are said to be holding around $150 billion of Greek government bonds. A bailout package will necessarily result in a steep reduction in the value of such holdings. These banks may have to be recapitalised. The extraordinary dependence on private capital will almost certainly exacerbate worries over the state of public finance in many countries. Other European countries considered weak by the markets will now come under pressure. As large global banks take a hit, the contagion will spread to other countries to which these banks have exposures. The rather tentative moves by Europe's politicians have not helped, but there is reason for their prevarication: in many countries, notably Germany and Finland, voters have generally been reluctant to share the cost of rescuing other countries. The crisis in Greece has brought into sharp focus the weakness of a stand-alone monetary union that does not have the usual fiscal and political foundations. A view is gaining ground that it will be in the best interests of everybody for Greece to exit the euro at least temporarily and then take measures that are in harmony with its own national interests.

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