Greece Not Out of the Woods Yet

Recently Greece’s monetary woes have caused havoc with the Euro and financial markets around the world. What happened? Due to years of unrestrained spending, falsely reported economic statistics, cheap lending and a failure to implement financial reforms, Greece was badly exposed when the international recession hit.

Greece’s national debt of $413.6 Billion is larger than the country’s economy, with some predicting that it will reach 120 percent of 2010 gross domestic product (the market value of all final goods and services made within the borders of the country in the year). Greece's credit rating, the assessment of its ability to repay its debts, has been downgraded to the lowest in the eurozone, meaning it will likely be viewed as a financial black hole by foreign investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise. The Greek government of Prime Minister George Papandreou, which inherited much of the financial burden when it took office late last year, has already scrapped most of its pre-election promises and must implement harsh and unpopular spending cuts. The government has implemented austerity measures aimed at reducing the deficit by more than $13.7 billion. It has hiked taxes on fuel, tobacco and alcohol, raised the retirement age by two years, imposed public sector pay cuts and applied tough new tax evasion regulations. Predictably, there have been warnings of resistance from various sectors of society. Farmers have begun blockading roads to demand greater government subsidies, while on February 10; workers nationwide staged a one-day strike closing airports, government offices, courts and schools. More strikes are expected to follow.

The Prime Minister said in an interview with BBC television broadcast today that "at this point we don't have a need for borrowing, our borrowing needs are covered until mid-March," in response to a question on whether there would be any new Greek bond issuance next week."Even though there are austerity measures and they do hurt, we have the support right now for the austerity measures which is around 50 to 60 percent of the population, and the government also has that support," Papandreou said.

Papandreou said European Union partners should continue to offer political support to Athens as it battles to get its public finances back onto a sustainable path." Let us together with the EU authorities, the Commission and the European Central Bank, let's sit down, let's look at how our progress is doing, how we're doing in the stability and growth plan that we have tabled," he said. "We're on target, beyond target on January statistics so we're doing well. If we do need extra measures, we will take extra measures in order to reduce our deficit this year by 4 percent. We're ready to do so if necessary." Papandreou said that while Greece was not asking for financial support from EU partners, it did need strong political backing as it battled to restore its credibility with financial markets. This was particularly important for Greece to be able to borrow at lower interest rates than it was currently facing, he said. "We need the help so that we can borrow at the same rate as other countries, not at high rates which undermine our ability to make the changes we need to make," he said.

Greece faces many challenges: the domestic debt crisis, loss of confidence in its ability to manage fiscal affairs, and the loss of competitiveness with its northern neighbors – especially with Germany. Despite these obstacles, EU partners have made a solemn pledge to support the country, and in the end Greece will be rescued, if it needs to be, due to substantial business, political and banking interests.

C. Cohn

Sources: Associated Press, Reuters