THINGS are looking worse for Greece with every day that passes. On Tuesday, the credit ratings agency Standard and Poor’s downgraded the nation’s debt to junk, while yesterday the interest rate for 10-year Greek bonds rose to 10.13 per cent, which is a record high for a eurozone country. Meanwhile, the cost of short-term borrowing for two-year Greek bonds yesterday reached a new high of 19 per cent.
Had the crisis been confined within Greece’s borders, nobody would have been talking about it but there are serious dangers of it affecting other economically vulnerable economies of the eurozone such as Portugal and Spain, not to mention the consequences for the euro.
Yesterday, the euro fell to a new one-year low against the dollar. It is also becoming more expensive for Spain and Portugal to borrow on the open market. Investors are demanding an interest rate of six per cent from Portugal and if yields keep rising, it will experience the same problems facing Greece – borrowing will become too expensive.
Everyone is now eagerly waiting to see what Germany, the eurozone’s most powerful economy will do. Will Chancellor Angela Merkel give the go-ahead for the €30 billion rescue package? Understandably, Merkel has been reluctant to do so because of strong public and political opposition at home – regional elections are also scheduled next month.
The IMF chief and the president of the European Central Bank were both in Berlin yesterday for a crisis meeting with Merkel. They were also meeting opposition politicians who are against the bailout.
Merkel has quite rightly insisted that Greece needs to take tougher austerity measures and cut spending even more before it receives the rescue package. Faced with mass demonstrations and civil unrest, the Papandreou government has been dragging its feet over additional spending cuts, sparking fears that it will not pursue them once it has been bailed out by the EU and the IMF. Can Greece be trusted to keep its side of the bargain after all the fictitious figures about public finances it has been giving the EU over the last seven or eight years?
“You have to economise, you have to become fair, you have to be honest; if not, nobody can help you,” Merkel was quoted as saying on Tuesday, in what was a clear warning to the Greek government. But back in Greece, nobody outside the government seems to be listening, with unions causing more and more disruption and populist politicians claiming the country was the victim of a foreign conspiracy. There have even been some calls for Greece to default on its repayments.
The likelihood is that Germany will eventually agree to the bailout before May 19, when Greece must refinance an €8.5 billion bond, but the Greek government will have to impose more cutbacks first. The country simply has no choice but it should consider itself fortunate to be part of the eurozone; if it were not, there would be no rescue package at all.
