Eurozone agrees second bailout for Greece

Stocks are rising today as the markets digest the news that Europe has taken a step back from the brink of economic disaster. Eurozone leaders yesterday agreed on a second €109bn bailout for Greece, something economists said had to come in the next few days to avoid calamity. Once again, Europe's leaders have taken a small step to narrowly avert disaster. But without a big step to reform the Eurozone, is there any end to the debt crisis in sight?

Greece's private lenders will be forced to participate in the bailout and take an estimated 21% loss on their loans to the country, in what is being called a 'selective default'. But it is still unclear whether the ratings agencies will decide this qualifies as a default or not. The private lender participation was something German Chancellor Angela Merkel wanted, but French President Nicolas Sarkozy and the European Central Bank had been resisting.

EU issues Greece an ultimatum - could it backfire?

Last night Eurozone finance ministers got tough with Greece, deciding to withhold payment of €12 billion in emergency loans until the Greek Parliament enacts drastic austerity measures. The move is intended to intimidate the opposition forces (which includes the majority of the Greek public) into accepting the cuts, as the Greek prime minister faces a confidence vote in parliament this week.

But given the enormous disaster that would likely befall the Eurozone if Greece leaves the currency union, is this a threat the EU can afford to make? There is a real risk that this latest move could backfire. Massive protests continue in Athens today as people stand in front of the parliament chanting "we won't pay". Inside the building, Socialist prime minister George Papandreou is holding a confidence vote to reaffirm his mandate before he attempts to push these austerity measures through the parliament.

Now facing defection from his own party's members and extreme pressure from public opinion, Papandreou's confidence vote will be a rollercoaster ride over the next few days. There is a chance that this latest move from the finance ministers will further enrage Greek public opinion, where there is already an impression that the EU, at the insistence of Germany, is dictating draconian measures in an anti-democratic way. A perceived insult like this could put public optinion in Greece over the edge and cause even more Socialists to withdraw from the parliament. If Papandreaou's government falls it could mean a default on Greece's debt and, most chillingly, a withdrawal from the Euro. These events could spiral out of control and cause a meltdown of the European economy, and maybe even the world economy. Given that reality, is this really a threat the finance ministers can afford to make?