BRUSSELS, Belgium — It’s hard not to feel sorry for Greek Prime Minister George Papandreou. For months, the financial markets have spat on his efforts to enact dramatic enough austerity measures to begin bringing his country's enormous deficit and debt under control.
After each round of budget cuts, as unions marched against him in the streets, Papandreou publicly declared that the new measures should stop speculation on his country’s economy. He waited expectantly for the markets to concede a bit of ground, for his borrowing costs to nudge down slightly, for the gap between Greek bonds and German ones to shrink just a tad, for some sign investors finally believed there would be no default. Each time, the markets refused to give in.
Last Friday, Papandreou looked a beaten man. He had reluctantly concluded that, despite rejecting the concept for weeks, he had no choice but to ask for an international bailout package.
“The moment has come for us to gain time that markets wouldn’t give us,” he admitted sadly. Surely the markets would react positively to the $60 billion package from eurozone countries and the International Monetary Fund (IMF).
On Tuesday, Papandreou had his response: You are "junk" to us, the markets declared dismissively after Standard and Poor's issued a downgrade. The move sent a message to Portugal especially, but also to Ireland and Italy. Portuguese Finance Minister Fernando Teixeira dos Santos recognized the danger at once, saying his nation must react to “attacks” by the markets.
But Papandreou must be wondering, while contemplating even more sacrifices, why doesn’t anything we do seem to make a difference?
The Greek leader is hardly alone in his woeful wondering. In Brussels, during a discussion between European Central Bank Vice President Lucas Papademos and members of the European Parliament, Greek parliamentarian Anni Podimata pleaded with Papademos for an explanation as to why the markets won’t let up on Greece. "Are they not convinced by the EU/IMF funding mechanism?” she asked. “Is pressure building up on all of the eurozone?”
Well, Papademos said gingerly, “There have been concerns about the fiscal sustainability of Greece and also the capacity of the country to refinance its debt in the shorter term.”
Truthfulness is also a problem. Greece has acknowledged fudging its figures back in 2001 to enter the eurozone, for which it wouldn’t have qualified with the true data. Then Papandreou’s predecessor was found to have misreported debt and deficit data for years. Even last week, statistics submitted by Papandreou were found to have underreported the deficit, which stands at 13.6 percent of GDP, leading Moody’s Investors Service to drop Greece’s creditworthiness score by a point.
Steve Weisman, a fellow with the Peterson Institute for International Economics in Washington, D.C., is more blunt than Papademos. “Markets are assuming that aid package right now is a bridge to nowhere,” he said. “[They] don’t see a long-term plan, they just see a short-term set of measures and they’re not sure if Greece has the fortitude or political willingness to carry it out, especially over the long term.”
The money offered under the EU/IMF deal will only help for about a year, though the measures will extend for three. The IMF has indicated it is ready to throw in another $13.2 billion, but even that is nowhere near estimates that it would take $145 billion over a three-year period to really shore up Greece's economy.
Weisman says investors are concerned about what will happen to the Greek debt they already hold. “It’s really not possible for Greece to do the things it has to do without some kind of restructuring of its debt where the debt-holders — mostly big banks in Europe — take a hit,” he said.
Any confidence budding after the string of austerity measures has likely been smashed by the reluctance with which Europe's powerhouse economy, Germany, is finalizing the loan. German Chancellor Angela Merkel doesn't want proceed with approval of the German portion until after regional elections May 9, due to the extreme unpopularity of the bailout among her conservative voters. Her delay for domestic interests is not sitting well with Brussels, much less Athens, creating concern that she actually might reject participation.
In what EU officials hope will be a last push on Germany to offer up its share, EU heads of state are likely to hold an extraordinary summit in Brussels on May 10 to authorize the loan they promised Greece.
And then they will all watch the markets together.