Budget Cuts Fuel Strike in Greece as Crisis Plot Thickens
by Hiland Doolittle
On Wednesday, Greek Prime Minister George Papandreou announced sweeping changes designed to trim $6.5 billion or approximately 2 percent of the country’s debt ratio to GDP. The Prime Minister hopes the changes will convince euro zone nations that his government is serious about tackling the massive debt, thus paving the way for assistance from the EU.
The spending cuts were not well received by the country’s biggest public sector union, which immediately called for a one-day strike on March 16th. In the meantime, 500 disenchanted pensioners marched on the finance ministry in Athens.
General Secretary Ilias Iliopoulos told Reuters News, “We will be on the streets with all our might. I am afraid there will be a social explosion. People will start to get hungry soon.” The Prime Minister may himself have inadvertently added fuel to the fire by comparing the country’s fiscal problems to a war, adding that harsh and seemingly unfair fiscal practices were now required.
Papandreou’s austerity announcement was well received in credit and exchange markets. The euro rose as Greece’s borrowing costs lowered. The risk premium on Greek 10-year bonds fell to their lowest levels since early February.
While the cuts may pave a temporary bailout path for Greece, the fact is that more actions will be necessary to cope with the country’s 300 billion euro debt level. That figure is an astounding 125 per cent of the country’s annual economic output.
Papandreou To Meet Merkel On Friday
German Chancellor Angela Merkel will be meeting with Papandreou on Friday. On Wednesday, Merkel again asserted her public position that no German government assistance would be forthcoming. The citizens of Europe’s biggest economy do not want their tax dollars used to bail out Greece.
The fate of the euro may well rest with Merkel’s decision. Merkel has demanded even more fiscal trimming before Germany would consider participating in any euro zone remedy. Germany does not want to be seen as a bailout nation for failed economies, of which there are many in Europe.
Spain is likely to be the next crises and the economy is significantly larger than Greece’s. Portugal, Italy and Ireland are not far behind in their unstable efforts to cope with the severe recession.
The German economic minister hailed the new Greek initiatives as an essential starting point in lowering the deficit to 8.7 percent of GDP from the current 12.7 percent level.
The fate of Greece may well rest on a soon to be released credit rating by Moody’s Investor Services. Standard and Poor’s has already downgraded the public debt below A. If Moody’s follows suit, as was suggested last week, Greek government bonds could no longer serve as collateral for the European Central Bank at the end of this year.
Despite an endorsement by the European Union, investors remained skeptical about the country’s ability to meet its declared goals. European Commission President, Jose Manuel Barroso, said, “Greece’s ambitious program to correct its fiscal imbalances is now on track.” Support was also forthcoming form the EU, who said the euro zone was ready to step in.
German and U.S. Watchdogs on Red Alert
German watchdog BaFin has joined the U.S. Justice Department in investigating speculators who may stand to reap big dividends if Greek borrowing is unfairly hindered. German inquiries have resulted in contacts with the Depository Trust and Clearing Corporation in New York. The clearinghouse records all purchases and sales of Credit Default Swaps which are very much in play.
At question is whether hedge funds should be permitted to invest in these swaps, which could serve to drive up the price of Greek borrowing. Reuters quoted a source as saying, “It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators.
In the U.S. the Justice Department has asked hedge funds to keep all trading records linked to euro trades. Speculation has been that certain funds collaborated investments to devalue the euro. Meanwhile many Wall Street banks, including Goldman Sachs, are under investigation for derivative trades with Greece. In Europe and the U.S. the plot thickens.
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
