Germany backed off of its demand that a Greek bailout involve tougher terms for private investors, an outcome that French president Nicolas Sarkozy today called a “breakthrough” and that cheered European markets.
A crucial meeting in Berlin today between German Chancellor Angela Merkel and Mr. Sarkozy smoothed over a dispute that has been holding up a bailout for Greece. Germany was insisting that private creditors of Greece exchange some of their short term Greek debt for longer, and therefore riskier, maturities. With Germany backing off that demand, the last obstacle to a desperately needed July payment from the European Central Bank to Greece has been removed.
"There is no time to lose," Sarkozy said after the meeting.
Greece is reeling from riots against austerity measures implemented as a price of the European Union bailout Greece needs to pay its debts. Without the July payment, a government default was likely – an event that would spike borrowing costs across Europe and potentially push other tottering economies like Portugal, Spain, and Belgium over the edge.
European markets responded positively to the news, although this is only a temporary reprieve, not a longterm solution to Greece's debt problems.
For the second time in a year, Greece is on the precipice of bankruptcy. European leaders are worried about how to deal with a eurozone charter member whose default would have severe repercussions for the euro, for European unity, and even for some US banks.
Greece owes some $400 billion in bond debt. Over $120 billion must be fully paid by 2014, and $17 billion is needed to pay debts by July 15, 2011. There is no money left in the Greek hopper, hence the desperate need for the bailout.
Making Greece wake up
For most of the past month European finance ministers listlessly debated about how to help as Greece sank further. Then a June 9 decision by the government of Prime Minister George Papandreou to make a further $40 billion of budget cuts – a condition for receiving a slice of last year's bailout money – proved too much for Greeks already angry about previous austerity measures.
The result: tear gas in Athens, sharper frustration among unemployed youths, and a cabinet reshuffle to avoid a government collapse. Today, Mr. Papandreou replaced his finance minister.
Moody’s, a credit rating agency, has warned it could downgrade its ratings for three major French banks exposed to Greek debt. German banks are also substantially exposed. Germany has taken a tough stand, asking for private investors to share debt risk -- while the European Central Bank has opted for a voluntary repurchase of Greek bonds.
Some analysts argue that Germany wanted to push Greece to the brink to drive home what Athens needs to do to reduce its budget deficit – such as eliminating dense layers of corruption and nepotism, which Papandreou has been surprisingly forthright about.
'Poisoning European politics'
The effect of the crisis is not restricted to Greece, the underbelly of the Balkans, which often seems a world away from Brussels. The crisis strains European relations and ideals. Some analysts describe a recent “cold war” between the European Central Bank and Germany. While the eurozone isn't going to break, it can suffer real harm, analysts say.
“This is a huge problem for Europe, and at the moment, it is poisoning European politics,” says Philip Whyte of the Center for European Reform in London. “It exacerbates tensions between the north and south [of Europe]. It creates divides between politicians and their electorates. And the whole mess is bringing another rise of Euro-skepticism.”
A key tension is over perceptions. In the wealthier north – Netherlands, Germany, Finland – new populist parties describe the south as feckless and freeloading. In the debtor “peripheral” nations – Greece, Italy, Spain, Ireland – budgets have been cut deeply and governments have fallen.
(Recent OECD figures show Germans working fewer hours than Greeks. Germans work 1,390 hours annually, while Greeks average 2,119 hours, Italians 1,773 hours, Portuguese 1,719, and Spanish 1,654 – according to a study by French investment group Natixis.)
Protests in Athens against austerity June 9 were fueled by Greeks from a range of persuasions – socialist left, nationalist right, and unions. They were given heft by a nonaligned and peaceful movement of “indignants” – young people who don’t want to hear that European elites can’t find a way out.
“This is the strangest situation ever,” says Rym Ayadi, senior economist at the Center for European Policy Studies. “A default is not a one-off. You weigh the cost of bailing out, and the cost of not bailing out. ... But no current plans seem built to deal with the long term problem.”