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On the Brink: Debt Crisis Roils Greece

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In the wake of violent demonstrations on Wednesday, debt-ridden Greece on Thursday attempted to reshuffle its government in an attempt to enact further austerity measures required by the International Monetary Fund (IMF) and European Central Bank (ECB) in exchange for a bailout. However, political defections on Thursday put those plans in jeopardy as politicians responded to the public outcry against draconian measures.

Reuters reported that Wednesday's demonstrations in Syntagma Square in Athens led Prime Minister George Papandreou to announce plans to rearrange his Cabinet and to submit to a vote of confidence over the measures, which have sparked huge outpourings of civil unrest in Greece. But the resignation of two lawmakers from Papandreou's party and discontent among some of those who remain may cause problems.

Planned austerity measures including higher taxes, the sell off of state assets and massive layoffs in a country where the unemployment rate already tops 16% have led to violence, as demonstrators clashed with police.

At the same time, arguments at a meeting intended to design a way out of Greece's dilemma resulted in an impasse. Germany, backed by northern allies, pressed for holders of Greek bonds to have to accept a swap for bonds with a maturity date seven years longer.

The ECB, European Union (EU) and France, fearful of a ratings disaster, all advocated a softer option in which bondholders would be asked to purchase new Greek bonds as their holdings matured.

However, ratings agencies threatened to class even such a softer plan as a restricted default, which would have repercussions throughout the euro zone. German Chancellor Angela Merkel was scheduled to meet on Thursday with Mario Draghi, who is expected to succeed Jean-Claude Trichet as head of the ECB, to try to resolve the issue. She then plans to meet with French President Nicolas Sarkozy on Friday.