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european debt crisis

ARIS MESSINIS

Why do investors, politicians and central bankers worry about a country as small as Greece?

In one sense, they don't. Greece accounts for less than 3 per cent of the European Union's gross domestic product (GDP). Its disappearance from the map wouldn't matter, though missing Greek islands would narrow the list of holiday options.

In another sense, Greece is a monster worry: Contagion.

If Greece defaults on its debt, or goes through a debt-shredding restructuring exercise, watch out. The first victims would be the European banks that hold Greek debt. They would get clobbered.

According to the Bank for International Settlements (BIS), European and American banks have $1.7-trillion (U.S.) of exposure to Portugal, Ireland, Spain and Greece - the so-called PIGS. They are the four euro zone countries in which the debt crisis is alive and well. Earlier this week, Standard & Poor's downgraded Greece's debt to junk. The ratings agency also whacked the debt rating of Spain, where the unemployment rate is now more than 20 per cent, though the country still retains investment-grade status.

Among the banks, those in Germany and France are the most exposed - between them, they hold more than $900-billion of debt issued by the four countries.

Of that amount, the Greek portion comes to some $75-billion for France and $45-billion for Germany (the data is from Sept. 30, 2009, before the Greek crisis began in earnest, suggesting the exposure to the PIGS might be somewhat less now).

Writedowns on the value of Greek debt would be bad enough. Writedowns on the debt issued by all four countries, should the contagion spread, would be significantly worse. It could easily trigger a second banking crisis. Some of the European banks that hold PIGS' debt had near-death experiences during the credit crisis that began with the collapse of Lehman Bros. in September, 2008. Bailouts and nationalizations saved the weakest ones. A sovereign debt crisis might finish them off, in turn sending shock waves through the global banking industry.

Euro zone finance ministers are meeting on Sunday to work on details of a financial bailout for Greece. It's not clear when a final package will be announced, but with a Greece facing a May 19 deadline to pay back maturing debt, the rescue needs to happen soon. As Europe marks May Day on Saturday, protests against government cutbacks in Greece could be tense.

It appears that keeping the fragile European banking system intact is the main reason behind the bailout being put together, albeit reluctantly, by the European Union, with the International Monetary Fund at its side. While many Germans oppose the idea of backstopping Greece, the country's support is essential. German Chancellor Angela Merkel may not want to funnel taxpayers' money to a country that lived beyond its means and fudged its budget deficit figures, but she has Germany's interests firmly in mind. Altruism isn't behind her stated willingness to send the cheque; protecting her banks is.

How the contagion could spread





Greece

Deficit (% of GDP) 13.6

Public debt (% of GDP) 115.1

GDP growth 0.7

Total GDP €237-billion

For the longest time, bond investors snapped up debt issued by Greece and the poorer cousins of the euro zone, happy to have high yields on bonds denominated in one of the world's stronger currencies and convinced there was little risk of a default. But that changed suddenly when European leaders dithered on a bailout, and Greece's debt was downgraded to junk status. A quick rescue might have prevented the stampede to the exits. Now, it will be tough to win investors back without an exorbitant cost.

Spain

Deficit (% of GDP) 11.2

Public debt (% of GDP) 53.2

GDP growth 1%

Total GDP €1-trillion

It was inevitable that the panic over Greece's financial plight would spread to other high-debt countries facing a grim economic outlook and sliding bond ratings. Spain has a far larger economy than tiny Greece; but much of its rapid expansion in recent years was tied to a since-exploded housing bubble. Its prospects of an early recovery are slim and its financing costs are rising.



Portugal

Deficit (% of GDP) 9.4

Public debt (% of GDP) 76.8

GDP growth 1%

Total GDP €163-billion

An even smaller economy than Greece wracked by recession and facing a heavy debt burden. It's not Greece, as its policy-makers repeatedly insist; but its debt ratings have been heading downward and it has been caught up in the panicked flight to quality.

Ireland

Deficit (% of GDP) 14.3

Public debt (% of GDP) 64

GDP growth 2.6%

Total GDP €163-billion

The country has been caught up in the climate of investor fear, mainly because of its huge budget deficit - the highest in the euro zone - and battered economy. But the government has done a much better job than those in southern Europe of reining in social costs, and its previous track record of fiscal sanity ought to help bring jittery investors back once the Greek smoke clears.

By Brian Milner, Eurostat





What's next: Key dates





SATURDAY, MAY 1



Key French ministers, including Economy Minister Christine Lagarde, meet President Nicolas Sarkozy to discuss an aid plan for Greece and the financial market situation.



Strike in Greece. Shops and stores will be closed. Disruptions to public transport.



SUNDAY, MAY 2



Euro zone finance ministers will physically meet in Brussels on the Greek reform and loan package, which, according to German parliamentarians briefed by IMF chief Dominique Strauss-Kahn, could be worth 120-130 billion euros.



There will be a press conference afterwards.



MONDAY, MAY 3



German government meets, to discuss Greece and give its approval to a draft law on providing loans to Greece. The government will then try to push the law through the lower house of the German parliament by Friday.



Once the details of the 2010-2012 loan package are known, all euro zone countries can push forward with legislation to be able to pay out the money by May 19 if and when needed.



MONDAY-FRIDAY, MAY 3-7



Greek parliament is likely to debate and vote on any additional austerity measures that are to be announced under the bailout package. The government also plans to submit to parliament a pension reform law, but the exact date or provisions of law are not known.



WEDNESDAY, MAY 5



Greece to hold a general 24-hour strike in the private and public sectors in protest against austerity measures. Teachers to hold a 48-hour strike on May 4-5.



European Commission to publish its forecasts for GDP, unemployment, inflation, current account as well as debt and deficit for 27 members of the European Union for 2010-2011 -- including forecasts for the debt and deficit of Greece, Portugal, Spain, Ireland and Italy.



FRIDAY, MAY 7



Upper house of German parliament to vote on the law allowing for loans to Greece. Once the law is passed by the upper house, in which the ruling coalition has majority, the money can be paid out.



MONDAY, MAY 10



European Union President said on April 28 in Tokyo that he would call a meeting of euro zone leaders around May 10 to activate the Greek package.



WEDNESDAY, MAY 12



European Commission to make a proposal on how to strengthen European Union budget rules and economic surveillance in the euro zone to avoid crises like the Greek one in the future. The Commission is also to propose a permanent crisis resolution mechanism that would allow the euro zone to deal with such problems in the future, should they arise after all.



WEDNESDAY, MAY 19



Greece has to pay back €8.5-billion in maturing debt - it has to have the euro zone and IMF loans by then.



Reuters

Greece's wasteful ways



From a bonus for showing up to work to a dead father's pension going to an unmarried daughter, arcane benefits bloat Greece's budget by billions of euros a year. Below are examples of some of the spending the government could cut:

SPOILED SPINSTERS



Tens of thousands of unmarried or divorced daughters of civil servants collect their dead parents' pensions, weighing on a social security system experts say will collapse in 15 years unless it is overhauled.



About 40,000 women benefit from the allowance at an annual cost of around €550-million, according to economic website capital.gr.



While the law protects civil servants from dismissal, it allows them to retire with a pension in their 40s.



Greek pension spending is expected to rise by 12 per cent of gross domestic product by 2050, according to EU Commission data. That compares with an EU average of less than 3 per cent of GDP.



The government has pledged to overhaul the social security system by raising the retirement age and banning early retirement. It plans a bill by May.



CHRISTMAS PRESENTS



In a system where bonuses can add 5 to 1,300 euros to a monthly paycheck, some civil servants are paid extra for using a computer. Some get a bonus for speaking a foreign language and others for arriving at work on time, while many foresters get a bonus for working outdoors.



All Greek public and private sector workers get 14 salaries a year, a structure aimed at keeping basic monthly salaries, and the pensions that are based on them, low.



Half a month's extra salary is paid at Easter and another half during the summer. The 14th salary is paid to civil servants at Christmas when the whole economy is geared to consuming it; taxis, restaurants and hairdressers are legally allowed to charge extra as "a Christmas present".



The government has already trimmed most bonuses by 12 per cent and Christmas and Easter salary bonuses by 30 per cent as part of its austerity plan, saving €1.7-billion.



FLYING FOR FREE



Labour unions foiled government attempts to sell debt-ridden Olympic Airways for decades, costing Greek taxpayers millions while employees enjoyed generous benefits - their family members could fly around the world for free.



The EU took disciplinary measures against Athens for pouring state money into the loss-making airline, even after private local airlines began servicing similar routes for less.



Olympic was sold in 2008, but only after the state lavishly compensated or re-hired about 4,600 employees. Many blocked Athens' thoroughfares recently because they had not received all their severance money.



The state owns 74 companies, mainly utilities and transport firms, many of which are overstaffed and loss-making, the OECD says. The main rail company employs about 9,000 people and reported losses of €800-million in 2008.



The government has said it will merge some state companies and sell stakes in others.



COMMITTEE FOR WHAT?



Hundreds of state-appointed committees employ staff though it is not clear what they all do. Greece has a committee to manage Lake Kopais, which dried out in the 1930s.



One Greek paper estimated that committees employ more than 10,000 people and cost over €220-million a year.



Coming through on a pre-election pledge to cut such waste, the government recently announced it would shut down or merge at least 200 such committees that have outlived their usefulness.



COSTLY ARMS



Tensions with arch-rival Turkey have kept Greek military spending well above that of other EU members, reaching €14-billion, or 6 per cent of GDP, in 2007 and 2009.



Budget woes have limited military procurements and the 2010 defence budget now stands at €6.7-billion ($8.92-billion).



But nearly 80 per cent of Defence Ministry spending goes on administrative costs and payments of army staff. The government has said it will gradually reduce costs and spending on arms purchases will be contained to €1.8-billion (0.7 per cent of GDP) this year.

Reuters

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