Greece's Prime Minister George PapandreouDIMITRI MESSINIS
Greece is under huge pressure from financial markets worried that the euro zone member will not be able to service its heavy debt.
Those concerns have put pressure on the euro, challenged the credibility of the European Union and raised questions over whether fellow European states would come to Greece's rescue. There is even some speculation Athens may be forced out of the currency bloc unless it can get its house in order quickly.
Following are some of the factors investors are watching.
CUTTING THE DEFICIT
Greece stunned markets in October when it revealed that its budget deficit for 2009 would be 12.7 per cent of GDP - over twice as big the previous estimate and more than four times the 3 per cent ceiling imposed by the EU.
Debt is forecast at 120.4 per cent of GDP this year, which would make it the most indebted country in the 16-member euro zone.
After a series of downgrades by debt rating agencies, Prime Minister George Papandreou has pledged to cut the deficit to under 3 per cent by 2012, with debt seen falling to 113.4 per cent in 2013. Austerity measures announced in December include welfare cuts and savings on public-sector wages.
The socialist government, which won an election last October on a pledge to tax the rich and help the poor to get Greece out of its first recession in 16 years - has also promised to speed up tax and pension reforms, but details remain sketchy.
WHAT TO WATCH:
- Further details on exactly where cuts will fall - and signs of opposition from unions and public opinion (see below). More details on the tax bill are expected this month, while changes to the pension system should be announced by end-April.
- Are ratings agencies happy with the cuts? Moody's said this month the key was implementation not pledges. Any new downgrade would pressure Greek bonds and the euro. Fitch, Moody's and Standard & Poor's all cut Greece's creditworthiness in December and maintain the country on negative watch.
- The EU is due to publish its recommendations to Greece on Feb. 3. According to a draft printed by a Greek newspaper, it will tell Athens to take extra measures by May 15 to shore up its finances including cutting nominal public-sector wages, including tax collection and setting a ceiling on high pensions.
SATISFYING THE MARKETS
Financial markets have not been impressed by the government's attempts to reassure them, with the impact going well beyond Greece's borders. Ultimately, Greece's fate will be decided by whether markets retain appetite for debt.
The euro fell below $1.40 on Thursday for the first time since last July, partly due to jitters over Greece, while the premium investors demanded to hold Greek debt rose to 4.05 percentage points over German bunds - the highest level since the creation of the euro.
The cost of insuring Greek government debt against default has also risen sharply, while bank shares have been hit by fears higher yields would affect their borrowing costs and hurt their bond portfolios.
Greece has already borrowed about €13-billion out of about €53-billion targeted for 2010. Markets appear still willing to lend money to Athens, as a heavily oversubscribed €8-billion 5-year bond sale suggested on Jan. 25 - the government's first bond sale this year.
But to attract investors, Greece has to sell its debt at ever steeper yields - on Jan. 25 the yield was 6.1 per cent compared to a similar bond issued last April at 5.5 per cent. This adds further strain to the budget and could choke off recovery, with banks charging higher interest rates on loans to households and businesses. A new 10-year bond issue is planned in February.
WHAT TO WATCH:
- Does market appetite for Greek debt remain? If it does not, or if yields become prohibitively high, Greece might need to turn elsewhere for help. Finance Minister George Papaconstantinou has said the next bond needs to be carefully timed and that it would be disastrous if the country had to finance all of this year's debt requirements at current rates.
- How successful is its upcoming bond road how in Asia and the United States? Greece says it wants to diversify its borrowing base but has set no targets for the road show.
- Do sovereign debt worries elsewhere - perhaps Dubai, Ukraine or another troubled fringe euro zone economy - further dent appetite for perceived risky government debt?
SAVIOURS ON THE HORIZON?
If Greece cannot get out of trouble on its own, the key question for markets will be what level of external support it can get, particularly from the European Union.
Euro membership allowed Greece to borrow more cheaply, with many investors believing in an unspoken "implied guarantee" from the EU and Germany. Now, they want more details but it is an option either Greece nor other EU states want to talk on.
Greek leaders insist they are not looking for a bailout and are seeking funds only through the markets, mainly in Europe.
Greece has denied reports it is looking to sell up to €25-billion of its bonds to China - although it is planning road shows in Asia and the United States soon.
EU officials, Germany and France have also denied that they plan to help, saying it is up to Athens to sort out its mess. The EU does not want to set the precedent of jumping to the rescue of a member state that has flouted its deficit rules.
The crisis has raised concerns of a domino effect engulfing other weak euro zone members, such as Portugal, Ireland, Spain and Italy.
An EU official said on Friday there were no formal talks on a bailout - despite rumours to the contrary - but there was the possibility of informal discussions in some EU capitals
The International Monetary Fund has said it does not expect any aid requests from Greece, making clear it believes euro zone bodies should be able to handle any calls for help.
WHAT TO WATCH:
- Comments from EU policy makers, Germany and France, however obtuse, may offer the best clues to thinking on a bailout. Currently, they rule it out.
- Market reaction. Any EU support for Greece would support Greek assets but could undermine German bunds
- A shift in EU or IMF comments suggesting an IMF deal might be becoming an alternative to an EU bailout.
SOCIAL UNREST WORRIES
Opinion polls show the public is willing to pay a price to overcome the crisis, but the country's most influential think-tank has warned of social unrest unless the recently elected left wing PASOK government acts quickly.
Mr. Papandreou's cost-cutting plan faces opposition both within his party and labour unions. While he may convince them to accept some mild reforms, deep cuts in the public wage bill and pensions would prove hard to swallow.
The two biggest public and private sector unions have already announced 24-hour strikes this month against an austerity plan which will mean a 3-per-cent salary reduction for civil servants and tax hikes for most Greeks.
Farmers have also been protesting, blocking roads and border crossing to EU fellow member Bulgaria to demand subsidies.
This comes against a backdrop of discontent among leftist and anarchist groups who last year triggered Greece's worst riots in decades.
WHAT TO WATCH:
- Renewed street unrest would unsettle markets, particularly if they feared reforms would be watered down as a result.
- Any suggestions internal splits, most likely around the currently marginalised socialist old guard, might imperil Mr. Papandreou's government would also worry investors.
- Small-scale bombings and other similar violence could further sour sentiment.