Analysis: Despite EU Move, Greece’s Future Still in Peril

Saturday, 18 Jun 2011 12:05 AM

By Lisa M. Ruth

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Despite a last minute promise of emergency loans by the euro zone, Greece’s future grew more perilous this week as widespread violence in response to austerity measures forced a cabinet reshuffling.

Tens of thousands of angry Greeks protested in Athens on Wednesday and Thursday over plans to raise over 6 billion euros through tax hikes and deep spending cuts. The demonstrations turned ugly as pockets of violence erupted and protesters attacked police, causing officials to send tear gas into the crowds. For the past two weeks Syntagma Square in Athens has been flooded with growing numbers of angry protesters eager to make their voices heard.

            Analysis:

The past two weeks of increasingly hostile and violent demonstrations in Athens indicate an unprecedented level of discontent among Greek citizens that could prove explosive.  The austerity measures have engendered broad-based antipathy and privatization plans have rattled the cages of public-sector employees and truculent Greek unions.  The nation’s abysmal fiscal track record and widespread corruption problems leave many skeptical that new bailout measures will do more than provide a temporary bandage to a deep problem.  Widespread public protests could spark increased violence, prompting action by the military to restore order. 

Patching together a temporary reprieve

In response to the anti-government demonstrations and political defections, Greek Prime Minister Papandreaou reshuffled his cabinet and replaced his finance minister on Thursday to form a team that could move forward with painful austerity measures and avoid a Greek default on its national debt. 

EU Economics Commissioner Olli Rehn tried to soothe international markets by issuing a statement on Thursday that he expected a euro zone meeting this weekend to approve a new tranche of emergency funds for Greece.  Rehn also said he expects a final decision on a long-term bailout package to be made in July.  Rehm’s comments were followed today by statements by French President Sarkozy and German Chancellor Merkel in which they closed ranks on their commitment to defend the euro.  These statements appeared to have the intended effect today, driving up U.S. and European stocks and causing a drop in the bond market.  

Despite this short term reprieve, a resolution to Greek debt crisis remains elusive.  Euro zone officials found little to agree on when they met in Brussels on Tuesday to craft a second bailout estimated near 90 billion euros to remedy a Greek debt predicament that is quickly spiraling out of control. At the center of the controversy was a German proposal to require all 27 EU member countries to contribute funds administered by the European Commission as part of a new bailout package to help prevent a Greek sovereign debt default. The UK, which is a member of the EU but not the euro zone, strongly objected, insisting that the Greek debt crisis is a euro zone matter exclusively and not an EU matter. Berlin had been insisting on the involvement of banks and private investors to share the debt burden – which the European Central Bank staunchly opposes for fear of causing contagion across Europe – but altered this stand today when Chancellor Merkel said that private investors should only participate on a voluntary basis. 


Market confidence sinks 

Market confidence plummeted this week amid fears of a Greek default.  The euro hit a record low against the Swiss franc yesterday and slid against the dollar.  Large protests in Athens and the failure of European officials to broker a deal in Brussels drove up the cost of insuring Greek debt against a default to a record high and left investors jittery over the possibility of financial crisis spreading across Europe.

Market outlooks were slightly more positive early last week after European Central Bank President Jean-Claude Trichet indicated willingness to approve bond rollovers in Greece as part of the privatization measures.  With the ECB fiercely opposed to debt restructuring of any sort, European officials are considering voluntary rollovers for private investors with Greek debt holdings. The announcement eased some investor’s concerns of growing instability and caused modest market gains. However, rating agencies responded with skepticism saying that any such rollovers would be considered coercive and equivalent to a Greek default. Italian central banker and possible future president of the ECB, Mario Draghi said Wednesday, “We should exclude all concepts that are not purely voluntary or that have any element of compulsion,” according to the Sydney Morning Herald.

            Analysis: 

Social unrest within Greece as well as tensions internationally will continue to amplify market effects.  Voluntary debt rollovers are unlikely to calm investors as the threat of downgrading and default from rating agencies looms overhead.  Amid tensions on all sides, Greek and European officials will find it extremely difficult to buoy markets in such volatile waters.

Some signs of progress

There have been some positive indicators as Greece announced the first step in raising money through state-owned assets early last week, selling a 10 percent share of telecommunications company OTE to Deutsch Telekom.  The 400 million euro deal is small compared to Greece’s 330 billion euro debt, but ECB officials assert that Greece has marketable state-owned assets that can amount to 300 billion euros, according to the New York Times.  Other German companies have shown interest in acquiring Greek assets for low prices.  The Wall Street Journal reports that German company Fraport AG is looking into a 55 percent stake in Athens International Airport.

Analysis:

Privatization instead of social cuts will likely prove more popular over the short term and will bring in immediate income, granting the government some breathing room both domestically and with the EU. External oversight is critical to the process, as true privatization requires a complete revamping of the economic culture to a deregulated capitalist system. However, such measures have already caused friction with unions as some 500 million workers began a nation wide strike Thursday, something that could further cripple the Greek economy. Strikes and protests also threatens the process of attracting and reassuring international investors, which Greece must do in order to sell enough state assets to make raise sufficient capital.

Rising public clamor over Greece’s euro zone future

EU leaders continue to stress solidarity as public discontent continues to grow.  German Chancellor Merkel categorically stated that Greece’s exit is, “not in our interest” and that “the euro zone should avoid giving the impression that its members can be divided.” Leading European economists at a recent Brookings Institute seminar in Washington D.C. called the idea of a Greek exit from the EU “purely hypothetical” and “absurd.”  However, Greece’s departure is clearly a topic of discussion among EU members.  Luxemburg Prime Minister Jean-Claude Juncker recently admitted, “…the question of Greece's withdrawal from the monetary union is certainly being discussed in public.”  According to Mark Weisbrot, Co-Director of the Center for Economic and Policy Research, “as much as the move might cost Greece in the short term, it is very unlikely that such costs would be greater than the many years of recession, stagnation and high unemployment that the European authorities are offering.”

             Analysis: 

Conflict over crafting a workable bailout plan will likely strain the EU’s formal commitment to keeping Greece in the euro zone. Even so, it remains unlikely that European official’s will capitulate at this point. From a EU perspective, the significant consequences of a Greek exit and the shockwaves of market instability it would likely cause across Europe seem less desirable than hefty bailout payments at the moment.  However, public calls from within for Greece to leave the euro zone are likely to increase as the uncomfortable impacts of austerity measures are felt at home and Greek discontent reaches a boiling point. 
 

No easy way out

Along with pressure from European officials and protesters, Greek Prime Minister George Papandreou faces growing pressure from his own Socialist party.  Papandreou’s decision to reshuffle the cabinet was announced after he opted against an earlier offer to step down and form a coalition government if the opposition agreed to the austerity program.

            Analysis:

Growing dissent within the prime minister’s own party indicates that protests have had a significant influence on lawmakers.  Papandreou will find it increasingly difficult to muster the necessary support at home to back the IMF/ECB bailout measures.  However, should a vote of confidence in parliament scheduled for Sunday on the new cabinet succeed, Papandreou will likely have the necessary votes to push through a medium-term plan later this month, a move that will procure bailout funds and surely incite further popular antipathy. With no good options left, the next few weeks will pit the EU’s resolve to keep Greece afloat against fierce Greek public opposition to reforms.  Moreover, perceived government incompetence combined with growing public instability raises the possibility of a move by the military to take control of the government.

 

Lisa M. Ruth is a former CIA analyst and officer.  She is currently Managing Partner of C2 Research, a boutique research and analysis firm in West Palm Beach, Florida and is Vice President at CTC International Group, Inc., a private intelligence firm.

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