Greek debt crisis: High stakes game of financial chicken

The European Union is pushing Greece into deep economic reforms as a way to end the Greek debt crisis and stabilize the weakening euro.

Petros Giannakouris/AP
A man fishes in front of an idle ferry at the port of Piraeus near Athens, during a 24-hour nationwide strike in Greece Wednesday. To keep the Greek debt crisis from mushrooming out of control, the European Union is proposing harsh cutbacks in spending. In response to the austerity measures, Greek unions staged a nationwide strike grounding flights, shutting schools, and crippling public services.

With Greece facing more than $30 billion in debt repayments in April and May, European countries are preparing to intervene. But before any bailout comes, what's emerging is a terrific game of financial “chicken.”

The European Union is demanding meaningful financial reform from Greece in return for a bailout. But major EU players like France and Germany are also worried about a euro crisis and the chances that a sovereign default by Greece could trigger defaults in country's like Spain or Portugal which are struggling with debt of their own.

If Greece, facing demands to maintain spending from its powerful public sector unions, fails to adopt austerity measures, economists say Germany and France might be forced to support a bailout to protect the euro. The Greek crisis represents the first crisis for the euro since it was adopted as a single currency a decade ago – and has become a political as well as an economic test for the EU.

On Monday, German Chancellor Angela Merkel told reporters that the euro is "in a period of great challenge" and said Greece must cut government spending to convince markets that it's serious about confronting its debt problems, both for its own sake and for the eurozone more generally. Markets, she said, "must have trust in the euro."

The big question is whether Germany, with its $200 billion trade surplus, is prepared to help Greece – or whether Chancellor Merkel will stick with her Sunday statement that a Greek bailout led by Europe's largest economy is “absolutely out of the question.” Over the weekend, the Wall Street Journal quoted Greek officials as expecting a bailout package worth more than $40 billion and led by Greece could be agreed to by Friday.

Today EU Commissioner of Economic and Monetary Affairs Olli Rehn is in Athens to investigate and advise Greece on a package of economic reforms. He told reporters Monday after meeting with the Greek prime minister that additional steps by the government must be announced "in the coming days."

Mr. Rehn’s trip is the result of an EU heads of state agreement last month. Then, EU officials said they would intervene “if necessary” to help Greece recover from a crisis brought on by inaccurate reporting of its financial conditions. Greece had not sought formal help at the time.

Reassured markets?

EU leaders hoped the announcement of an "in principal" commitment to help Greece would reassure markets and buy time for German leaders to convince their constituents that a bailout for Greece is necessary. In early afternoon trading the euro fell to $1.348, close to a nine-month low.

“The announcement by the heads of state [in February] was a powerful one,” said Thomas Klau of the European Council on Foreign Relations in Paris. “That Germany would change this and go back on its word is unthinkable in European politics."

“I think the strategy is not to let Greece off the hook too soon," Mr. Klau said. "The German prime minister and finance minister are ready for reform … but whether junior ministers are ready to embark on what will be a wrenching cultural change, it is not so sure.”

Greek Prime Minister George Papandreou has come up with a plan to shave his budget deficit by freezing wages, raising the retirement age, curbing bonuses, and raising taxes. But whether he can cut four percent from the current 12.7 percent budget deficit -- currently four times the eurozone limit -- is questionable. The EU has set a March 16 deadline for Greece to show progress in cutting the deficit.

Merkel took a tough love line yesterday, telling German radio that, "we have a [European] treaty under which there is no possibility of paying to bailout states in difficulty."

Yet other members of the eurozone are expecting France and Germany to relent, perhaps once it is the euro, and not the Greek nation, that needs saving. The Wall Street Journal report said that state-owned banks in Germany and France might buy Greek bonds before the end of the week to stabilize markets.

David Deddouche, a currency specialist at the French bank Societe Generale, argues that he does not see the euro falling to parity with the dollar, as other analysts have predicted.

But he admits that the current unprecedented crisis will require concerted action to avoid a euro collapse: “Conceiving a zone with a common currency and independent political and fiscal sovereignties was revolutionary. Worse, there is not in Europe, for the moment, a clear plan of crisis management in public finances. This uncertainty is weighing hugely on the euro,” Mr. Deddouche said.


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