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Deeply in debt, Greece faces a Spartan future

February 10, 2010|By Henry Chu
  • A firefighter holds a flare as others chant slogans during a protest against planned spending cuts outside the Greek Parliament.
A firefighter holds a flare as others chant slogans during a protest against… (Petros Giannakouris / Associated…)

Reporting from Athens — Christos Maggelis is nothing but a bit player in the latest Greek drama. Yet somehow, he fumes, he's the one being punished by the gods.

Those would be the ruling politicians of this sun-kissed land who, like Hercules and the Augean stables, face a cleanup task of mammoth proportions: getting rid of a toxic mountain of government debt that threatens the financial health of much of Europe.

To do so, Greece wants to cut the pay of hundreds of thousands of civil servants on its overstuffed payroll as part of a tough new public-spending regimen. But Maggelis and his fellow workers are fighting back with a massive walkout planned for Wednesday and the promise of more strikes to come.

"It can't be that civil servants pay for the mistakes of past governments," Maggelis said. "The only result of this policy is that they'll add more poor people to the number of poor already out there."

On Tuesday, rumors spread across global financial markets that the European Union, led by Germany, was preparing a bailout package for Greece, possibly in the form of loan guarantees.

That speculation eased worries that a new phase of the global credit crisis was looming, and helped trigger a rally on Wall Street. The Dow Jones industrial average jumped more than 150 points, to 10,058.64.

But any bailout probably would come with more demands for spending cuts that could further devastate the Greek economy.

EU authorities, who will meet Thursday in Brussels, would have to make the terms of any help "so ugly that everyone else says, 'I don't want that to happen to me,' " said John Taylor, head of FX Concepts, a large investment fund that trades global currencies.

All eyes have been fixed on Greece since the newly elected government announced in October that its budget deficit was far larger than previously estimated -- 12.7% of the country's gross domestic product, more than four times the limit allowed under rules set for the "eurozone," the club of 16 nations that use the euro as their currency.

Skittish investors were left to wonder whether Athens would be able to pay off its debts or whether it might collapse beneath their weight.

Similar fears have spread to other countries, with markets nervous that a potentially game-changing debt crisis could engulf all of Europe's ailing "PIGS": Portugal, Ireland (some include Italy), Greece and Spain. Investors are especially worried by Spain, which has yet to emerge from recession, because its economy is large, whereas the other economies on the list are relatively small.

Mounting fears about the countries' debts have driven up interest rates on Greek, Portuguese and Spanish government bonds in recent weeks. Investors also have hammered the euro's value and raised questions about the 11-year-old currency's future.

Even a Europe-led bailout, however, would merely minimize, not eliminate, the sense of collective embarrassment on the continent.

The Greek Socialist government's new austerity plan calls for pay cuts and hiring freezes in the public sector, cuts in welfare spending, higher taxes on fuel, a rise in the retirement age and a crackdown on the endemic tax evasion and corruption.

Officials say the measures will cut the big fat Greek deficit down to 3% by 2012, although some analysts describe that as wildly optimistic.

The EU has given its seal of approval but, in an unprecedented move, has essentially put Greece under supervision, demanding regular progress reports from a country with a reputation for fiddling with its economic figures.

Because of investor fears, Greece's credit ratings have been slashed, making borrowing much more expensive. That's bad news for the government, which must raise about $32 billion over the next few months to service its debt.

One in six Greek workers is employed by the state, usually in a job guaranteed for life, meaning that any attempt to slash the public payroll is guaranteed to run into a buzz saw of resistance. Layoffs are political dynamite; no government, not even the present one, which was elected by a landslide in the fall, dares to suggest a big shedding of jobs.

Others dependent on the public purse are also not afraid to lash out when feeling threatened. Farmers demanding higher prices for their goods have blocked highways in northern Greece for weeks, at one point shutting down the border crossing with Bulgaria.

The question is whether Greece's leaders will maintain their resolve in the face of public opposition.

Last week, Prime Minister George Papandreou went on national television to urge his compatriots to unite to "stop the country's course toward the cliff."

Polls suggest that a majority of Greeks back the "brave decisions" Papandreou said were necessary to get the country's accounts in order.

His government now has a window of opportunity to quickly push its austerity plan through Parliament, said Michael E. Massourakis, chief economist at Alpha Bank, one of Greece's largest private financial institutions.

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