Amid falling European markets and mounting fears of a Greek government default, European financial ministers gave Greece an ultimatum Monday: approve stricter budget cuts or default.
Greece had been relying on the promise of a $17.1 billion bailout -- a critical piece of a promised $158 billion lifeline -- in order to avoid being forced to default in mid-July.
Now, European financial ministers have taken their hardest line against Greece yet, handing down a two-week deadline. Greece must sell state assets and implement steeper budget cuts and tax hikes by July 3, or risk defaulting.
The ultimatum from European financial leaders, coupled with Greece's own political instability, could quicken the country's seemingly inevitable march toward admitting that it cannot meet all of its obligations. If that admission comes too soon, it could roil international markets and cause a string of major bank failures and government defaults across Europe, endangering the euro and the American economic recovery, according to economists.
If Papandreou is replaced, it remains unclear whether the politicians that would replace him would have the mandate to rein in the debt as much as European financial leaders are demanding. Papandreou's proposed measures fall short of what is necessary, according to some economists.
With the turmoil in Greece escalating, investors avoided risky investments Monday. Although U.S. stock markets rose modestly Monday morning, stock prices for American banks such as Goldman Sachs, J.P. Morgan, Bank of America, Citigroup and Wells Fargo plunged more than one percent soon after trading began.
The cautious upward rise of Wall Street stocks on Monday helped lift European stocks, which had plummeted more than one percent earlier on Monday. As of early Monday afternoon, the FTSE 100 in Britain had fallen 0.38 percent and the CAC 40 in France had fallen 0.63 percent.
Italy's FTSE Italia All-Share had plummeted 1.97 percent, in light of a recent threat by the ratings agency Moody's Investors Service to downgrade Italy’s credit ratings because of its exposure to Greek debt. A downgrade could effectively increase Italy's debt burden if panicked investors demanded higher interest rates, increasing the likelihood of default by the Italian government.
If Greece suddenly defaults, it could very well cause a chain of government defaults and major bank failures across Europe, scaring American banks from lending and endangering the American economic recovery.
"If Greece is just unable to pay its debts, we are going to see finance suddenly freeze up," Gus Faucher, an economist at Moody's Analytics, a research firm independent of the ratings agency, told The Huffington Post on Friday. "We are going to see huge drops in stock prices. Firms are going to get very cautious, very anxious again. They're going to lay people off. It's going to be very similar to what we saw in late 2008, early 2009, on top of what we already had. So it would be really disastrous for the American economy."
The International Monetary Fund warned Monday that the debt crisis in Greece and other indebted countries, such as Ireland and Portugal, threatens the European economic recovery and could cause a global financial crisis.
The IMF implored countries that have received aid to show "a determined commitment" to cutting their deficit and returning to solvency, while also urging European leaders not to abandon indebted countries. The IMF warned that a sudden default by any members of the European Union could lead to "large global spillovers."
Recent reports released by the economics research firms Roubini Global Economics and MKM Partners have warned that Greece still is very much in danger of default.
In a report released on Friday, MKM Partners warned France and Germany's proposed mix of budget cuts and bailouts would not work for Greece unless the European Central Bank starts to devalue the euro, effectively reducing the debt burdens of troubled European countries. The European Central Bank has taken a hard line against inflation, leaving countries like Greece with fewer and more extreme options to address their debt -- steep budget cuts, sudden default or leaving the European Union altogether.
The recent report by Roubini Global Economics suggested that Europe's current approach likely will prove itself ineffective. The report said that since the debt burdens of countries like Greece are unsustainable, bailouts by other European countries -- "the preferred crisis-management tool so far" -- have not generated enough benefits to ease the fears of either investors or the indebted countries.
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