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Greece’s long-standing public debt problem became a crisis at the start of 2010 and has since escalated to a point where it threatens the survival of the euro. In the face of rising government borrowing costs, the country first requested international assistance on 23 April 2010. The €110bn eurozone-IMF loans agreement it received came with strict conditions on economic policy and reform. A worsening recession and rising public opposition to further austerity meant the Greek government struggled to meet the conditions of the agreement. Meanwhile, the prospects of it returning to borrow on the open market by 2012, as originally envisaged, became increasingly hopeless.

Drawn-out discussions on a second ‘bail-out’ for Greece began at an official level on 22 July 2011, and by 21 February 2012 the pieces of a more complicated arrangement had almost fallen into place. As well as the traditional ‘loans and austerity’, the second bail-out involves Greece’s private sector creditors taking losses on their holdings of Greek sovereign debt: this follows from a belated recognition that no amount of austerity and loans on their own could put Greece’s debt burden on a sustainable footing.

The second agreement avoided the imminent prospect of disorderly default only until parliamentary elections in Greece on 6 May. The indecisive result, and the polarisation of parties over Greece’s continued acceptance of the terms of the bail-out, meant no government could be formed. Another election has been called for 17 June. If Greece rejects the terms of the loans agreement, its future in the eurozone will ultimately be a political decision on the part of the rest of the eurozone. The European Central Bank is the institution with the power to force the withdrawal of Greece from the euro, by denying its national central bank and financial institutions access to emergency funding.

The consequences of Greece’s departure from the eurozone are highly uncertain. Within Greece, the extent of disruption will depend on whether it receives support from EU Member States and institutions, in the short-run by their agreeing to capital controls, providing technical assistance and possibly funding the recapitalisation of Greek banks, and in the long-run by their allowing Greece to remain within the EU.

The exit of one country from the eurozone, though it would undoubtedly be characterised as ‘exceptional’ by eurozone leaders and officials, would inevitably raise questions about the cohesion of the single currency. Even if Greece did eventually prove to be the exception, it is argued by some that the uncertainty this would create would lead to a costly period characterised by risk aversion, reduced confidence, depressed asset prices and economic contraction in the wider euro area. The UK, through its trade and financial linkages with the currency union, may see its faltering recovery stifled further, were the eurozone crisis to continue or worsen following Greek exit from the single currency.

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