As the clock ticks down to crucial deadlines for debt repayments, euro-zone finance ministers are holding a knife to Greece's throat, warning that Athens won't get its hands on desperately needed rescue cash unless it takes immediate action to slash its deficit.
Beleaguered Greek Prime Minister George Papandreou faces a critical confidence vote late Tuesday on the austerity plan - which features heavy budget cuts, tax hikes and further asset sales - and is counting on a slim majority to prevail in a deeply divided parliament grappling with the country's deep recession.
Greece's euro-zone partners want the tougher measures approved by July 3 or they are threatening to withhold the next €12-billion ($16.8-billion) instalment of a €110-billion aid package crafted in May, 2010, by the European Union, the International Monetary Fund and the European Central Bank.
Without the infusion, Greece, which needs about €1-billion a month to finance its budget deficit and another €500-million to meet bond interest payments, could be forced to default on its debt obligations by mid-July. Greece is also seeking a second rescue package in excess of €100-billion to tide it over to 2013.
Politicians around the world are closely watching the European developments, because of fear that the Greek debt crisis, if unchecked, will infect the healthier core economies of the euro zone and spread to the international financial system. Dozens of global financial institutions could be exposed to a Greek financial collapse through holdings of credit default swaps on Greek sovereign bonds. The result could be a new financial crisis that undermines fragile recoveries in North America and elsewhere.
"There is a real danger of contagion stemming from the situation in Europe," Finance Minister Jim Flaherty told an international insurance conference in Toronto Monday.
Mr. Flaherty has had conversations with European and other G7 finance ministers and central bankers about the fiscal crisis.
The G7 ministers held a second conference call Monday after earlier discussing the threat to global markets from a Greek default.
"We have a calendar. We have a road map," French Finance Minister Christine Lagarde told reporters in Luxembourg. "Efforts have to be undertaken, in the first place by Greece, which leaves here knowing that it has considerable parliamentary efforts to make."
While the direct exposure of Canadian banks and insurers to Greece is relatively minor, Mr. Flaherty said the situation has the ability to impact the financial system globally if it's not dealt with speedily. But he added that he expects it will be resolved.
"The approval of the Greek parliament is absolutely essential and it will have to arrive in a timely fashion so we can take a decision on July 3," declared Jean-Claude Juncker, who heads the group of 17 euro-zone finance ministers. "It is clear that the debt is sustainable, but the debt will only remain sustainable if Greece fulfills all its commitments." The ruling Socialists hold 155 of the 300 seats, but the party has been roiled by internal divisions over the painful cuts already enacted in an economy in a deepening slump.
The IMF, whose auditors have been closely monitoring Greek finances, warned European leaders Monday they must stop dithering over the Greek aid or they could quickly face a spreading crisis throughout the single-currency region, one that could spark another global financial collapse.
"Failure to undertake decisive action could rapidly spread the tensions to the core of the euro area and result in large global spillovers,"
the IMF said in its annual checkup on the euro-zone's economic and fiscal health.
The direct impact of the debt crisis in the peripheral euro-zone countries on the global economy "is relatively minor" because they are such small economies, IMF acting managing director John Lipsky told reporters. But he added that "the implications would be much more serious" if the peripheral country debt woes were to affect the financial systems of the core European economies.
Most observers assume the flat-broke Greek government has no choice but to accept the terms set by their euro-zone partners, no matter how onerous or politically suicidal those may be. The consensus is that Mr. Papandreou's majority will hold and his newly revamped government will get the legislation it needs for the next austerity drive.
"Our base case is that the confidence is retained and the medium-term fiscal plan is approved (possibly with some changes, brought about by the new finance minister)," Barclays Capital said in a report. "A cross-party agreement in the near term, which would be a clear positive, is more unlikely, though."
But Athens is not without some defensive weapons of its own, no matter how the vote turns out. The beleaguered government or an interim replacement could use the mere threat of default and the wide repercussions that would stem from it to make the next phase of this lengthy rescue more palatable to the Greek electorate and less damaging to the sinking economy.
For the Europeans, it's a case of pay now and keep delaying the day of reckoning - and inevitable Greek restructuring - until French and German banks have written off considerably more of their Greek debt and have stronger balance sheets and Spain is in better economic shape - or put the entire euro zone at grave risk.
"The amount of aid the Greek government will receive through current negotiations will likely result in another crisis next year or the year after, and then more cuts in benefits and wages," warned Peter Morici, a business professor at the University of Maryland. "Importantly, these deals do nothing about private debt - the mortgages, auto loans and credit card balances Greek citizens are expected to pay as their salaries are cut and cut."
With a file from reporter Tara Perkins