Greek crisis Monday, 03 October 2011 03:21

Greece is yet again at the edge of the biggest sovereign default. Wildcat strikes in Greece have prevented the country’s bureaucrats from finalising next year’s vital budget figures, potentially holding up this month’s release of sorely needed fiscal aid. The so-called troika — the European Commission, the European Central Bank and the IMF — are in Athens to inspect the budget figures before deciding whether to release the next €8bn ($10.9bn) tranche of its current bail-out loan. Greece has said it will run out of money to pay its bills by mid-October if it does not receive more aid. But the country’s European creditors have questioned whether politicians were serious about meeting fiscal targets that were imposed as part of a $150bn bailout approved in 2010. After two international-bailout deals and three years of recession Greek Prime Minister George Papandreou says throwing in the towel now would be a “catastrophe.” Potential consequences of a national bankruptcy include the failure of the country’s banking system, an even deeper economic contraction and government collapse. Policy makers are worried about global shock waves of an insolvency by a government with $483bn of debt — five times the size of Argentina’s $95bn default in 2001. Europe has been battling for nearly two years to show convincingly that Greece and other heavily indebted nations such as Italy and Spain will pay all their bills. World markets remain skeptical, and have pushed up borrowing costs for governments and banks throughout the 17 nations that share the euro as a currency. The issue is a key concern to US policymakers, who worry that a Greek or other government default in Europe could trigger bank failures, throw the region back into recession — and drag down the US economy in the process.

Greece has proposed painful measures to meet steep targets that it agreed to as a condition of receiving the bailout money, including deep pay cuts, layoffs in the public sector and higher taxes. So far, many of the proposals have remained just that, although they have provoked violent opposition in the streets of Athens. The IMF said that Greece will shrink 5 percent this year and 2 percent next year, reversing a forecast of a return to growth in 2012. Unemployment is set to rise to 16.5 percent this year, and to 18.5 percent next year, the highest in the European Union after Spain and dry kindling for potential social unrest.

Speaking after a meeting in Paris with Papandreou, French president Nicolas Sarkozy said the Lehman collapse had plunged the world into economic crisis but Europe would not allow the same thing to happen. “The failure of Greece would be the failure of all Europe,” Sarkozy said. If Greece defaults on its debts, it could set off a chain reaction across Europe, since the government in Athens has borrowed money from banks in other countries. Those banks, in turn, borrowed from still more banks — meaning that fearful banks could stop lending to each other altogether if Greece defaults, as in the United States after the failure of Lehman Brothers in 2008.