For some time now, many thought the problems of Greece and sovereign debt issues were done. But a new wave of austerity measures to comply with the International Monetary Fund and European Union aid programs sent tens of thousands into the streets of Athens and violence at Syntagma Square. Prime Minister George Papandreou is forming a new cabinet, particularly seeking a new finance minister, before a vote of confidence is taken in the Greek Parliament later this week. Failed talks with the European Central Bank led to a new series of budget cuts, causing another nationwide strike as pensions and government services are further reduced. The impact of this on the global markets, including the U.S. Dow Jones, was very negative. Especially coming on the heels of another downgrade in Greece′s bond rating to Triple-C, the worst of all developed countries.

greece austerity measures

There is now little doubt that the Greek bailout will cost more than previously thought. The speculation now casts uncertainty on other bailouts for Portugal, Ireland, Italy, and Spain, the other PIIGS. Three major banks in France are also being reevaluated for their solvency, again raising the specter that the European Union itself is in grave jeopardy.

The sovereign debt issue in Greece stems from two major problems. Excessively generous government social programs, especially for government employee unions, and financing their over-spending using those highly toxic mortgage-backed securities, mostly originating from the United States. While the housing bubble in the U.S. continued to grow, Greece was able to maintain its generous social safety net and public services. Once the bubble burst, Greece must now pay interest rates thirty-plus times higher than most other nations to finance their debts through bond sales.

As protests and riots over austerity measures raged today in Athens, centered at Syntagma Square, the unrest in Greece caused markets in the rest of the European Union, and in the United States Dow Jones, to drop. New spending cuts were proposed by Prime Minister George Papandreou to comply with the International Monetary Fund and European Central Bank. A vote of confidence is expected later this week as Papandreou seeks to make changes in his cabinet, including a new finance minister. Greece now has the worst bond rating of any developed country, Triple-C, eight notches below junk status. Greek′s sovereign debt crisis is far from over and will inevitably cost more than previously expected.

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