Will the Greek crisis spiral into default?

Submitted by martin on 28 April, 2010 - 2:25 Author: Colin Foster

The economist Wolfgang Munchau has written a series of articles in the big-business paper the Financial Times over the last month arguing that Greece is now bound to default [i.e. fail to pay its international debts] sooner or later.

His argument runs as follows. In the run-up to the global financial crisis, and even in the early phases of it, the eurozone ran with a big trade surplus for Germany matched by a big flow of loans from German and other richer-country banks to the poorer eurozone countries, like Greece, which were running trade deficits.

Now the flow of new credit is drying up. Greece has to pay its debts. But drastic cuts will depress its economy and leave it with less output to pay its debts from.

Other countries which have scraped through similar debt crises have done it by devaluing their currencies, thus expanding their exports and getting more income to pay the debts with.

Because Greece is in the eurozone, the Greek government cannot do that. It has no control over its exchange rates.

By 25 April, Munchau's predictions were becoming more, not less, alarmed. "Unless we hear some implausibly good news from Athens by Friday, [the crisis] will soon blow up". And "the crisis will spread to Portugal and beyond". It will then be a huge crisis for the whole eurozone, not just Greece.

Thus it looks as if the huge cuts planned by Greece's Pasok (social-democratic) government may not even allow the government to go on paying its international bills.

Greek unions have organised renewed strikes against the cuts, and plan a further general strike on 5 May.

The European Union and the IMF have agreed in principle on IMF loans to Greece, and the first loan money is due to be delivered by 19 May. But meanwhile:

"The interest rate that Greece would have to pay to borrow new funds soared to 11.142 percent from 9.73 percent late on Tuesday [27 April].

"Greek 10-year bonds have now lost 30 percent of their value since mid-March as the... government in Athens struggles to contain its debt and public deficit to ward off default.

"The latest surge in yields followed a move Tuesday [27th] by ratings agency Standard & Poor's to slash the country's credit status to junk levels, meaning that big investors such as pension funds will no longer be allowed to buy Greek debt" (AFP).

A little-discussed factor in the crisis is Greece's high military expenditure. It spends much more, in proportion to national income, than any other European country, about two-thirds more, proportionately, than the UK and France, and consequently has spent a lot on military imports (http://bit.ly/1aqSiL).

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Submitted by AWL on Thu, 06/05/2010 - 12:19

By ELENA BECATOROS (AP, 6 May)
ATHENS, Greece - Greek bank workers walked off the job in a 24-hour strike Thursday to protest the deaths of three colleagues trapped in a bank torched by protesters during massive demonstrations against the government's new harsh austerity measures.
Wednesday's deaths - the first such fatalities in protests in nearly 20 years in Greece - have shocked the public in a country where violence during demonstrations is frequent but rarely results in casualties.
"I have difficulty in finding the words to express my distress and outrage," President Karolos Papoulias said late Wednesday. "Our country came to the brink of the abyss. It is our collective responsibility to ensure that we don't step over the edge."
The deaths came as an estimated 100,000 people marched through Athens during a nationwide strike against additional austerity measures imposed to unlock a euro110 billion ($142 billion) rescue loan package for debt-ridden Greece from the International Monetary Fund and the other 15 countries that use the euro.
Deputies were debating the measures Thursday and were to vote on passing the draft bill on Thursday night. Prime Minister George Papandreou's Socialists hold a comfortable majority of 160 deputies in the 300-seat Parliament, and the bill is expected to pass easily.
Greece urgently needs the first installment of loans from the rescue package if it is to avoid defaulting on May 19, when it has euro8.5 billion in bonds maturing. The measures slash salaries and pensions and hike taxes, outraging many Greeks.
Wednesday's demonstration - the first since the new measures were announced Sunday - quickly turned violent, with hundreds of protesters breaking away from the march and trying to storm Parliament, shouting "thieves, traitors."
Demonstrators ripped up paving stones, hurling them and Molotov cocktails at buildings and police, who responded with repeated barrages of tear gas that lingered in the city's central Syntagma Square late into the night. They smashed shops, hotels and car rental stores along their march, burning at least two buildings - the bank and a branch of the Finance Ministry - as well as several vehicles.
Police said Thursday that 41 police were injured in the riots, as were 15 civilians. A total of 70 people were detained, of which 25 had been arrested by late Wednesday night.
A senior fire department official said lives could have been saved but that demonstrators prevented firefighters from reaching the burning bank.
"Several crucial minutes were lost," the official said. "If we had intervened earlier, the loss of life could have been prevented."
The bank workers' union, OTOE, called a strike for Thursday to protest the deaths of their colleagues - two women and a man, aged between 32 and 36 - condemning the violence but saying that the deaths were the result of the government's move to impose austerity measures.
Many banks in central Athens remained open despite the call for a strike, however.
"OTOE categorically condemns those who carry out such acts of violence," the union said. "But this tragic event that took the lives of three of our colleagues ... is the sad consequence of the anti-popular measures which stirred up public rage and the protests of hundreds of thousands of people."
The union blamed politicians, the police and bank management for being "morally responsible" for the deaths.
"But serious political responsibility also lies with the government, which appears not to have calculated the size and the extent of the consequences" of the joint IMF and EU rescue package, it said.
Still, the government has little choice but to implement the harsh measures, which even IMF officials have called draconian. Greece has seen its borrowing costs on the international market soar to unsustainably high levels, reaching interest rates of above 10 percent - four times those of Germany's. Without the eurozone and IMF rescue package - under which Athens will receive loans at interest rates of about 5 percent - the country will be unable to refinance its debt.
However, there are fears that the bailout won't stop the debt crisis from spreading to other financially troubled EU countries like Portugal and Spain. On Wednesday, credit ratings agency Moody's put Portugal on watch for a possible downgrade.

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