Greece back where it began - in the mire
April 9, 2010
AFTER enacting painful austerity measures and winning a deal for a European and International Monetary Fund financial backstop, Greece is back in a familiar position: borrowing costs have soared and the stockmarket is sagging.
Predictions of default or an expensive bailout are again on the rise, leaving investors to wonder what is next in the country's struggle to pull itself out of the debt crisis.
The Prime Minister, George Papandreou, this week said a euro zone-IMF rescue plan, agreed in Brussels last month, had helped the recovery effort. ''This was clearly a great success for our country … it guaranteed a safety net for Greece,'' he said. ''We got a breathing space.''
But Mr Papandreou's upbeat message was undermined by another brutal day for Greece in the markets, and increasingly dire analysts' predictions. For a second day, Greek bond yields hit highs of more than 4 percentage points above German 10-year bonds, considered a benchmark of safety.
The higher interest rates demanded by bond investors are potential poison for the budget. Unless rates fall, the government will pay a premium to borrow and face a vicious circle as higher borrowing costs fuel default fears.
Shares fell nearly 3 per cent to less than 2000 points on the Athens stock exchange. Battered bank stocks led the decline, after four of the largest lenders asked to tap a remaining instalment of a €28 billion ($40.3 billion) government aid package.
A default would be a serious blow to the euro, and fears have compounded that Greece's woes will spread to other countries with weak finances such as Portugal and Spain.
Athens's troubles have weighed on global stock prices amid fears over big government debts in the developed world.
Philip Whyte, at the Centre for European Reform think tank in London, said the pressure was on European leaders to produce ''a proper rescue package'' similar to that for European banks that ended a market panic in 2008.
The Brussels agreement would allow for bilateral euro zone and IMF loans but only with the unanimous approval of all 16 euro zone members and if it were a last resort for Greece.
Markets have dismissed the backstop because it makes loans so difficult to obtain. Germany opposes bailing Greece out of years of overspending.
''Frankly, the agreement that they came up with a couple of weeks ago was smoke and mirrors … it wasn't a real agreement,'' Mr Whyte said.
''If yields remain at 7 per cent plus, given the amount of debt that Greece needs to roll over this year, we could well see a default within the euro zone,'' he said.
''Greece is the first in a series of dominoes and unless the euro area comes up with a credible package that gets it out of the mess it is in, markets could quickly turn their attention to countries like Spain.''
Greece's centre-left government was elected in October facing debts of €300 billion. It has pledged to cut the budget deficit from 12.7 to 8.7 per cent of annual output this year and last month announced an extra €4.8 billion in austerity cuts.
But questions have been raised as to the true budget deficit figures. The Finance Minister, George Papaconstantinou, acknowledged the figure could be slightly revised but not by as much as 1 percentage point, as some have suggested.
Associated Press