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Greek debt crisis: Bailout likely, but will it be enough?

The Greek debt crisis continued to roil European debt markets on Wednesday after a leading rating agency cut the country's debt status to junk. While short term aid to Greece is a near certainty, economists warn that more international cash – and painful political steps in Athens – will be needed.

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"As the contagion risk of a debt restructuring at this point could be significant, it is irrational for the EU and the IMF to push Greece into any restructuring early on as part of a bailout package – even if a restructuring cannot be excluded at a later point,"' argued Ghezzi and Keller at Barclays.

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They point out that the real problem for Greece is not its short-term need for cash, but persistent deficits. They imagine a scenario in which a €90 billion package over three to four years could get Greece back on its feet. But they call for it to be coupled with an increase in the tax base and massive cuts in government spending that would turn a fiscal deficit that ran at 8.4 percent of gross domestic product (GDP) in 2009 to a surplus of 6.4 percent by 2014.

"It cannot be emphasized enough that even such a large financial package would by no means present an 'alternative' to the necessary fiscal adjustment by Greece," they wrote. "Rather, it would give the fiscal adjustment a chance in the first place by providing affordable financing ... and thereby avoiding Greece's immediate default."

Is such a fundamental restructuring in Greece likely? That, at the moment, amounts to the €100 billion question. "The trouble is that the Greeks need a basic change in lifestyle (paying taxes, declaring income, having real jobs) and it probably will take quite a nasty crisis to convince them to do so," explained David Goldman, former head of global credit strategy at Credit Suisse and now an editor of First Things online magazine, in an e-mail.

Greece's powerful public-sector unions signaled their sentiments this week. Transport workers held a strike on Tuesday, and they have been warning for months that they don't intend to bear the brunt of the pain from a problem they blame on government corruption.

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