European Union leaders used a deal with Greece to remove the immediate threat that the Greek debt crisis will infect the rest of Europe, but made it clear the country would have to do most of the heavy lifting.
The risk is that Greece will not be able to hold up its end of the bargain because of the painful spending reductions it would have to make this year and for several years to come as the government tries to reduce the EU's biggest deficit.
This morning, a day after a civil servants' strike shut down schools, airports and other public offices across Greece, EU president Herman Van Rompuy and his European Commission counterpart, Jose Barroso, announced a deal had been reached to help Greece overcome its debt problems.
No details were released Thursday and may not be released until euro zone finance ministers meet on Monday. The euro zone is made up of the 16 EU countries, including Greece, that use the euro.
“There is an accord,” Mr. Barroso told reporters in Brussels, after a meeting of the leaders of Greece, France and Germany. “Greece won't be left alone, but there are rules, and these rules must be adhered to.”
The comments had an immediate positive effect on the currency and stock markets. The MSCI World Index of 23 developed countries rose 0.3 per cent at 9 a.m. ET, while the yield premium on Greek bonds fell to the lowest level in a month as investors took the view the risk of default on the bonds is diminishing. The cost of insuring Greek debt also fell. The yields on bonds of other euro zone countries with debt problems, such as Portugal, declined.
If Greece does require assistance to avoid default, it would come from wealthy EU countries such as France and Germany, it appears. Donald Tusk, Poland's prime minister, told reporters that, “It could be voluntary loans from member states. That seems to be the best option.”
Mr. Van Rompuy said that Greece did not ask for support, suggesting that the country feels it is under no immediate threat of defaulting because it is still able to sell bonds, though only at high interest rates.
Economists and analysts are not convinced that Greece can avoid a bailout even though prime minister George Papandreou has promised his socialist government will do everything it can to crunch the deficit. Among the measures announced so far are fuel tax hike, pension reform and wage freezes for public servants. Details of many of the reforms, however, remain scant.
The question is whether the government has the political will to keep a tight austerity plan in place for not just one year, but many years.
Yesterday's strike may be the first of many. Another general strike is planned for Feb. 24. In December, 2008, Athens erupted in violence demonstrations swept the city. The riots were triggered by the police killing of a teenage student, but also reflected the frustration among the unemployed about lack of job prospects. It's an open question whether the government has the stomach to endure potentially violent social unrest as spending comes down.
In a note published last week, UBS economists said: “The short term risk is the possible rejection of the fiscal plan by Greek citizens. After all, this fiscal consolidation will be exceptionally demanding for the economy and very painful for the voters. We think that there is a risk, in the near future, to have social unrest which eventually could push the Greek government to cancel or simply water down the [austerity] plan.”
