Masked Protesters Clash with Greek Police

Associated Press

 

Dozens of masked youths clashed with police at a union protest Tuesday in Athens during the country's fifth general strike this year against the cash-strapped government's planned pension and labor reforms.

Riot police fired tear gas and stun grenades to disperse troublemakers who threw chunks of marble smashed off metro station entrances and set rubbish bins on fire. Running clashes continued along a major avenue - lined with shuttered shops and banks - as rioters armed with wooden clubs made repeated sallies against police.

However, Tuesday's clashes were far more muted than the riots that erupted during a previous general strike on May 5, when three people died after becoming trapped in a bank torched by rioters.

Riot police chased demonstrators into a main subway station. An AP photographer saw police detain one young man in a metro carriage, spraying him with pepper spray.

The demonstration ended soon after, and rioters melted away towards the central Exarcheia district - a traditional anarchist hangout.

No arrests were immediately reported, but AP reporters saw at least six people being detained. One motorcycle policeman was injured by a chunk of marble thrown at him, while rioters smashed bus stops and phone booths.

The violence came as some 10,000 people took part in a demonstration organized by the country's two main labor unions and fringe left-wing groups. An earlier separate march by some 6,000 members of the Communist Party-backed PAME union ended peacefully.

Tuesday's strike shut down public services, disrupted transport, left hospitals operating on emergency staff and pulled all news broadcasts off the air. The country's airports, however, remained open, and international flights were operating normally although nearly 100 domestic flights were canceled.

Unions fiercely oppose draft legislation submitted to parliament last week that would increase retirement ages and make it cheaper for companies to fire workers. The measures - which include raising women's retirement age to 65 to match those of men and require 40 years of social security contributions for a full pension - are aimed at fixing the country's debt crisis, which has shaken the entire euro zone.

"They've declared war on you, fight back!" PAME demonstrators chanted as they walked down a major avenue in the center of the capital.

Greece is caught in a major debt and deficit crisis; it avoided bankruptcy last month only after receiving the first installment of a €110 billion ($136 billion) emergency loan package from the European Union and the International Monetary Fund.

In return, Athens passed painful austerity measures, cutting pensions and salaries and raising consumer taxes, and is now pushing through labor and social security reforms.

Parliament is to start discussing the proposed reforms Tuesday, in a debate expected to last more than a week. Despite opposition from several of its own lawmakers, the center-left government - which holds a seven-seat majority in the 300-member house - is expected to win the final vote.

Tension mounted once more in the country's main port of Piraeus early Tuesday morning, where hundreds of PAME demonstrators attempted to prevent tourists and locals from boarding ferries to Aegean islands, even though a court had declared seamen's participation in the strike illegal.

"They want to put us in a straitjacket so we work for free all our lives so that some can have their wealth and get very rich at our expense," said Sotiris Poulikogiannis, a protester in Piraeus. "We don't accept this. Day by day we'll grow stronger and more aware of how to overturn this situation."

The Civil Protection Ministry said all ships scheduled to leave in the morning did set sail, with about 350 passengers. However, about 50-100 people didn't manage to board their ferries as strikers prevented them from entering the port. Authorities said their tickets would also be valid Wednesday.

Another four ships that were to sail for Crete and the Cycladic islands in the early afternoon had informed passengers that they would depart at midnight, the ministry said.

A similar strike by two seamen's unions last week - which was also declared illegal - left thousands of travelers stranded in Piraeus for a day. Shipping companies and officials in Greece's vital tourism industry strongly criticized the government for not taking action to stop the strikers.

Greece to Probe U.S. Banks' Role in Crisis

Reuters

 

 

ATHENS, May 16 (Reuters) - Greece may investigate U.S. investment banks and their role in the run-up to the Greek debt crisis which has shaken faith in euro zone economies, Prime Minister George Papandreou said in comments broadcast on Sunday.

Wall Street and major banks around the world are attracting scrutiny from regulators who are looking at transactions that occurred in the run-up to the subprime mortgage meltdown and financial crisis.

U.S. prosecutors are already conducting a broad criminal investigation of six major Wall Street banks to determine if they misled investors.

"We are right now having a parliamentary investigation in Greece which will look into the past and see how things went the wrong direction and what kinds of practices were negative practices," Papandreou told CNN.

"There are similar investigations going on in other countries and in the United States ... I hear the words fraud and lack of transparency. So yes, there is great responsibility here," he said. Asked whether there was a possibility of legal action against the banks, he said: "I wouldn't rule out that this may be a recourse also ... but we need to let the due process proceed and make our judgments once we get the results from the investigations."

The European Union and International Monetary Fund agreed a 110-billion euro ($140-billion) bailout of Greece a week ago after Greek bond spreads hit record highs which meant Athens could not service its debts.

The Greek government has been forced to make swingeing spending cuts and hike taxes in an attempt to reduce its deficit from some 13 percent of GDP to the euro zone target of 3 percent.

Papandreou said his government had already cut its budget by 40 percent in the first quarter compared to last year and that revenues from VAT were also up by 10 percent.

But the measures are likely to come at a huge social cost and investors are watching closely the tide of anger and protests welling in Greece and looking to see whether Papandreou's Socialist government will withstand the public pressure or go soft on the reform programme.

But even as large protests regularly fill the streets of Athens, opinion polls show most Greeks believe the EU-IMF package was necessary to put the country back on track. Most however believe the burden is being unequally shouldered by ordinary people, while the wealthy and politicians prosper.

Papandreou said he was determined to succeed.

"What we are saying is that we are ready to make the changes. Greece is a proud nation, we have made our mistakes, we are living up to this responsibility, but at the same time give us a chance, we'll show you," he said.

Greek State Workers Escalate Protests at Budget Cuts

Bloomberg

 

Greek government workers shut down schools and hospitals and disrupted flights as demonstrators occupied the Acropolis in an escalation of protests against 30 billion euros ($40 billion) of additional wage cuts and tax increases unveiled this week.

The ADEDY union federation, which represents more than 500,000 civil servants having their pensions and pay slashed under measures announced May 2 by Prime Minister George Papandreou, will hold a rally at midday joined by striking teachers. A general strike, the third this year, is planned for tomorrow, with private-sector workers due to participate.

“Protests will increase,” said Spyros Papaspyros, the head of ADEDY. “Opting for the easy path of cutting wages and pensions can’t be accepted.”

Papandreou has called on Greeks to endure more sacrifices in return for an unprecedented 110 billion-euro bailout from the European Union and the International Monetary Fund. The austerity measures, called “savage” by union groups, include a second set of wage cuts for public workers, a three-year freeze on pensions and a second increase this year in sales taxes and the price of fuel, alcohol and tobacco.

Protesters from the Communist Party of Greece draped banners over the walls of the ancient Acropolis citadel in Athens today that said “Peoples of Europe Rise Up” in Greek and English, as tourists took photographs. Unemployed teachers yesterday disrupted the evening news show on state-run NET TV.

‘Terrorizing’ Tourists

Government spokesman George Petalotis condemned the occupation of the Acropolis, saying on NET TV that such protests “aimed to destroy tourism to Greece by terrorizing foreign visitors.”

“My trip is complete,” said Roger Smith from the U.S. as he took photos of the protests below the Acropolis. Smith, on his first visit to Greece with his wife, Diane, said rich Greeks, like rich Americans, needed to pay their taxes.

Elected in October on pledges to raise wages for public workers and step up stimulus spending, Papandreou revised up the 2009 budget deficit to more than 12 percent of gross domestic product, four times the EU limit, and twice the previous government’s estimate. EU officials revised the deficit further on April 22, to 13.6 percent of GDP.

Investor Concern

The surge in the budget gap as the economy contracted fueled investor concern about Greece’s ability to finance the deficit and sent borrowing costs to the highest since before the start of the euro in 1999. Papandreou has pledged to cut the shortfall to within the EU limit of 3 percent in 2014.

Fifty-one percent of Greeks say they won’t accept new austerity measures and would join protests against them, according to a poll of 1,000 people by ALCO for Proto Thema newspaper. That compared with 33 percent who would accept them. No margin of error was given for the poll, which was conducted from April 27 to April 29.

Most Greeks feel anger and dismay rather than relief over Papandreou’s decision to request emergency loans, a separate survey showed. Just 14.8 percent of the 1,256 people polled by Kappa Research April 28-29 for To Vima newspaper felt relief or hope after the move, compared with 31 percent who answered “anger,” 30.6 percent “disappointment or fear” and 22.8 percent who said they felt “shame.” The margin of error for the poll was 2.6 percentage points.

Aid Package

Greeks were divided on whether Papandreou needed to ask for the aid package with just over 50 percent saying it was necessary and 41.9 percent saying it could have been avoided, according to the Kappa poll.

With cuts in wages and increases in taxes, the Greek economy is forecast to shrink 4 percent this year and 2.6 percent in 2011. Unemployment has risen to 11.3 percent, a six- year high.

Archbishop of Athens and All Greece, Hieronymos, the leader of the Greek Orthodox Church, said the Church, which represents most of the 11 million Greeks, would stand by the “battered Greek people” and urged “unity, strength and optimism,” according to the state-run Athens News Agency.

Finance Minister George Papaconstantinou said the government plans to submit legislation on the latest budget cuts to parliament today. Papandreou has a 10-seat majority in parliament, enabling the government to push through the measures.

Electricity Company

Tomorrow’s general strike could disrupt public transport, air traffic, ferry sailings and other services as workers from shopkeepers to sportswriters walk off the job. Employees at Public Power Corp SA, the state-controlled electricity company, also will strike.

An air-traffic controllers’ strike will mean all flights at the Athens International Airport, the country’s biggest, will be cancelled. Greek carriers Aegean Airlines SA, which cancelled 17 flights for today, and Olympic Airlines SA won’t operate any flights tomorrow.

The government also promised changes to the pension system, such as raising the retirement age for women in the public sector, increasing the number of years worked before qualifying for a pension and overhauling labor rules to make firing workers easier and cheaper. Labor Minister Andreas Loverdos plans a press conference on the measures today.

Some economists say the worst is yet to come. Paul Mylonas, chief economist at National Bank of Greece, anticipates social unrest “will be muted this year” and could grow as the austerity measures continue into the coming years.

“The risk is more for ‘adjustment fatigue’ going down the road,” Mylonas said. “There’s a higher risk of social opposition for further reforms in 2011 and 2012 if light doesn’t begin to appear at the end of the tunnel.”

Bailout Fails to Calm Europe

The Wall Street Journal

 

 

International stock and bond markets sank Tuesday, dashing hopes that a weekend deal to bail out Greece would calm investors and stop the government-debt crisis from spreading.

In Athens stocks tumbled 6.7%, and in Spain they dropped 5.4%. Especially hard hit were shares of European banks that have hefty exposure to Greece's debt and economy. The cost of protecting against default on sovereign debt soared, and the euro hit a 12-month low.

The selling spread across the Atlantic, sending the Dow Jones Industrial Average down 225.06 points, or 2%, its biggest drop in three months. Investors bid up prices of U.S. Treasurys as they sought their relative safety.

Social unrest in Greece, coupled with uncertainty over whether European nations will approve the bailout plan, fueled investor concern about Greece and about whether European officials will take seriously concerns about the deficit outlooks for countries such as Spain, Portugal and Italy.

"It's Kabuki theater," said John Brynjolfsson, chief investment officer at hedge-fund manager Armored Wolf. "They describe this bailout as a done deal, but it's not a done deal."

That was highlighted by officials in Germany and Slovakia, who continued to cast doubt on whether Greece would be able to live up to its commitment to implement austerity measures to rein in its deficit—steps that are required for the European Union to hand over the bailout money.

In Slovakia, a new entrant to the euro zone, Prime Minister Robert Fico said he doubted whether Greece would be able to go through with the austerity measures outlined.

"Personally, I don't believe that the Greek parliament will be able to approve the restrictions," Mr. Fico said.

In Germany, politicians have been busy defending the €110 billion ($143 billion) aid package for Greece against public skepticism in Europe's biggest economy. Finance Minister Wolfgang Schäuble told the Rheinische Post newspaper that Greece won't get the emergency funds if it doesn't stick to its austerity pledges. "Then Athens may be on the verge of insolvency again," Mr. Schäuble said.

As markets kept falling, investors began speculating that the European Central Bank would have to take more aggressive steps to shore up the continent's bond markets, such as buying European sovereign debt or lowering interest rates.

In a sign of rising fear in the markets, Spanish bonds fell on Tuesday as rumors swirled that Spain would soon seek a bailout, prompting Prime Minister José Luis Rodríguez Zapatero to issue a public denial.

At a press conference in Brussels, Mr. Zapatero condemned the talk as "complete madness." Worry about any other country besides Greece "is totally unfounded and irresponsible," he said.

The challenge facing policy makers is that until they can prove to investors that budget-deficit issues will be addressed, the markets can end up in a cycle that makes the situation that much harder to control.

Bond markets punish heavily indebted countries by forcing them to pay higher interest rates, making it harder for those countries to pay lenders.

In addition, those higher interest rates slow economic growth, which reduces tax revenues.

"The debt dynamics [for Greece] look like the Argentina dynamic did in 2000," a year before that country defaulted on its debt, said Michael Hasenstab, manager of the Templeton Global Bond Fund.

While the bailout package should help Greece pay its bills in 2010, "our primary concern is that the crisis will come back in 2011, 2012 and 2013," said Mr. Hasenstab, who is betting that the euro will decline in value.

There are parallels to the financial crisis of 2008, when many investors believed the collapse of the market for subprime mortgages would be contained. Losses on those loans turned out to infect markets around the world.

Subprime problems largely infected banks and institutions that bought the debt. A similar situation could arise in Europe.

Holders of sovereign debt, primarily banks in Germany, France and Spain, are seeing their stocks decline and their borrowing costs rise as investors factor in losses on those bond portfolios.

That in turn can make it harder for those banks to lend to businesses, which could damp economic growth.

It was the selling of bank shares that spooked the markets most on Tuesday, traders said. In Spain, Banco Santander SA slumped 7.3% and Banco de Valencia SA fell 7.7%.

Some investors reacted with displeasure to the European Central Bank's decision on Monday to ease the pressure on Greek banks by saying it would accept any Greek government bonds as collateral for loans, no matter their credit rating.

The ECB's past rule had been to accept only bonds above a certain minimum rating. ECB President Jean-Claude Trichet had said previously he would not take such a step.

For investors, the move highlights how the ECB is effectively absorbing some of the risks facing Greek banks, since those institutions will now be able to exchange even "junk"-rated bonds for cash.

Such lenience, some fear, could soon be applied to other profligate European countries, further entrenching Europe's debt problems.

"That's a blow to the ECB's credibility," said Claire Dissaux, head of global economics and strategy at Millennium Global Investments in London. She said she expects the euro to fall further.

Business Highlights

Trade deficit shrinks as auto and oil imports drop

WASHINGTON (AP) - The U.S. trade deficit unexpectedly shrank in January, reflecting a big drop in imports of oil and foreign cars. American exports also fell, a potential blow to hopes that the economic recovery will be aided this year by U.S. sales abroad.

The Commerce Department said that the trade deficit declined to $37.3 billion in January, a drop of 6.6 percent from a revised December deficit of $39.9 billion. Economists had been expected the deficit to widen to $41 billion.

U.S. exports dipped 0.3 percent, reflecting weaker sales of a wide variety of products from civilian aircraft and machinery to agricultural products. But imports dropped by a larger 1.7 percent as both oil and foreign cars saw big declines.

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Stocks climb for 3rd day as financial shares rise

NEW YORK (AP) - A rally in financial stocks Thursday helped the market extend its grind higher to a third day.

The Standard & Poor's 500 index cleared an important hurdle watched by traders when it closed just above its January peak to set a new 17-month high. That could bring some hesitant buyers into the market.

The Dow Jones industrial average rose 44.51, or 0.4 percent, to 10,611.84.

Stocks have traded in a narrow range since the Labor Department said on Friday that employers cut fewer jobs in February than analysts expected. The market is looking for more signs of progress. The week's quiet trading comes as investors look for more signs about the direction of the economy.

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Greece hit by strikes, clashes over austerity plan

ATHENS, Greece (AP) - Clashes between riot police and rock-throwing, masked youths broke out during a demonstration Thursday in central Athens by tens of thousands of striking workers protesting austerity measures that the Greek government has said it has no choice but to implement.

The debt-ridden country is under intense pressure from both markets and the European Union to reduce its deficit from 12.7 percent of economic output in 2009 to 8.7 percent this year. Last week, Greece introduced a harsh $6.5 billion austerity package that cut civil servants' wages, froze pensions and raised consumer taxes.

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Slowly, Americans are regaining their lost wealth

WASHINGTON (AP) - Americans are recovering their shrunken wealth - gradually. Household net worth rose last quarter, mainly because the healing economy boosted stock portfolios. But the gain was slight. And it was less than in the previous two quarters.

The Federal Reserve said Thursday that net worth rose 1.3 percent in the fourth quarter to $54.2 trillion. It marked the third straight quarter of gains. But economists say consumers would need a stronger and more prolonged increase in their wealth to persuade them to ratchet up spending.

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Gov't may seek more authority on vehicle safety

WASHINGTON (AP) - Government vehicle safety regulators may seek greater authority to investigate defects in cars and trucks and are weighing a range of new safety requirements in response to Toyota's recall of more than 8 million vehicles over brake and acceleration problems.

David Strickland, head of the National Highway Traffic Safety Administration, said Thursday his agency will take a "hard look" at the power it has to set safety standards for automakers.

But one lawmaker at a House hearing said the agency's problems seem to have more to do with "ineptitude" and lack of money than with insufficient powers.

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Citigroup CEO says bank on path to profitability

NEW YORK (AP) - Citigroup Inc. is poised to return to "sustained profitability" as it sheds risky assets and focuses on emerging markets, CEO Vikram Pandit said Thursday.

Investors embraced his bullish view, sending Citigroup shares up 5.6 percent to $4.18.

Pandit didn't give a timetable for returning to profitability. But he said Citigroup, the hardest hit U.S. bank during the financial crisis, sees big opportunities in emerging markets including Latin America and Asia, which generated about half of Citigroup's 2009 revenue.

In 2009, Citigroup lost $1.61 billion, or 80 cents per share. It lost $27.68 billion, or $5.61 per share in 2008.

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BP to pay $7 billion for Devon exploration rights

LONDON (AP) - BP is expanding its dominant oil and gas operations in the Gulf Mexico and dropping anchor off Brazil with a $7 billion deal to buy exploration rights from Devon Energy.

BP will get the rights for 10 exploration blocks in Brazil and others in the Gulf of Mexico and in the Caspian Sea near Azerbaijan. BP also is selling a 50 percent stake in its Kirby oil sands interests in Canada to Devon for $500 million. The companies will form a joint venture as Devon beefs up its North American onshore portfolio.

BP PLC already is the largest leaseholder in the Gulf of Mexico with more than 650 blocks producing over 400,000 barrels of oil equivalent daily.

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Senator to offer his US financial regulation bill

WASHINGTON AP) - Unable to muster bipartisan agreement on key banking provisions, the chairman of the Senate Banking Committee said Thursday he will offer his own version of a sweeping overhaul of financial regulations without Republican support. "Clearly, we need to move along," Sen. Christopher Dodd, a Democrat, said.

A month of talks between Dodd and Republican Sen. Bob Corker had found common ground, but details on key provisions, including consumer protections and other sticking points, remained unsettled.

Dodd said he hoped the Senate could act on a bill sometime in the next three months.

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Smithfield Foods sees profit in 3Q, tops forecasts

PORTLAND, Ore. (AP) - Smithfield Foods Inc., the nation's largest hog producer and pork processor, reported a profit on Thursday for its third quarter after more than a year of losses.

Meat companies have struggled for two years with a mix of high feed prices, low demand and industry consolidation battered their profitability but they are showing signs of recovery.

The company reported that it earned $37.3 million, or 22 cents per share, for the quarter, up from a loss of $105.7 million, or 74 cents per share, in the same quarter a year earlier, when Smithfield said the cycle reached its lowest point.

The Dow Jones industrial average rose 44.51, or 0.4 percent, to 10,611.84.

The S&P 500 index advanced 4.63, or 0.4 percent, to 1,150.24, above its Jan. 19 close of 1,150.23. The Nasdaq composite index rose 9.51, or 0.4 percent, to 2,368.46 for its sixth straight advance.

Benchmark crude for April delivery rose 2 cents to settle at $82.11 a barrel on the New York Mercantile Exchange.

In other Nymex trading, heating oil was virtually unchanged, settling at $2.115 a gallon, and gasoline dropped 1.31 cents to end the trading session at $2.272 a gallon.

In London, Brent crude lost 20 cents to settle at $80.28 on the ICE futures exchange.

Greece: Papandreou on Tightrope as Endgame Approaches

Financial Times

In private, Greek analysts have been debating for months exactly when the Socialist government would make what was widely seen as an inevitable U-turn on the economy.

That shift - in the form of the toughest fiscal package in the country's post-second world war history - came yesterday after several months of sustained pressure from financial markets.

In the aftermath of a sweeping victory at national elections last October, George Papandreou, prime minister, had been unwilling to abandon pre-electoral promises of wage increases, higher social spending and huge public investment in "green" development.

It took both turmoil on Greek bond markets and a "series of private ear bashings", as one Athens official put it, from Europe's most senior political and economic personalities to persuade Mr Papandreou to chart a radically different course.

José Manuel Barroso, European Commission president, Jean-Claude Trichet, president of the European Central Bank, and Angela Merkel, German chancellor, all warned the prime minister in recent weeks that, without more aggressive reforms, Greece risked being cut adrift by its European partners.

At yesterday's cabinet session called to approve a freeze on pensions, cuts in Christmas and Easter bonuses for public sector workers and rises in value added tax, Mr Papandreou is said to have told a potentially rebellious minister that socialist ideology would have to be set aside, at least temporarily.

In public the prime minister, who still enjoys high approval ratings, has ratcheted up the rhetoric to reflect a deepening sense of crisis among Greeks. The new measures, he said, were necessary to avert "a catastrophe" - a word associated in Greece with the disastrous 1922 military defeat by the Turks that plunged the country into years of economic crisis, including a sovereign default.

The new measures are due to be approved by parliament this week under emergency procedures, opening the way for Mr Papandreou to travel to Berlin and Paris at the weekend to argue the case for Greece to receive some form of financial support from its eurozone partners.

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Stephen Gets Help to Explain the Greek Financial Crisis

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
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Such support he hopes could allow Greece to return to international markets to finance its bloated public debt. However, a raft of challenges lies ahead. Deadlines loom for the Socialists to push through legislation modernising the tax system and announce an overhaul of the debt-burdened state pension system.

Moreover, Greece's recession could be deeper than the "worst-case" scenario for this year's budget. IOBE, a private sector think-tank, predicts the economy will shrink this year by 2.2 per cent, a significantly higher figure than the government's minus 0.3 per cent target.

Meanwhile, the stand-off with the unions escalates. Ominously, Mr Papandreou appeared yesterday to have lost the backing of Adedy, the main public sector trade union. Spyros Papaspyros, Adedy president, said that by cutting the bonuses, which grant two extra annual salaries to public sector workers, the Socialists crossed a red line. "We are not going to become sacrificial victims, regardless of the struggle to save the country," he said.

Given the unions' capacity to create havoc in the streets of Athens, as well as the ability of officials to delay the implementation of reforms, it is too early to say whether the Socialists' third try will succeed. The markets, too, still have to be persuaded the Socialists can turn Greece round.

Mr Papandreou, a famously patient politician, will have to persevere to turn his announcements into reality.

The Real Greek Tragedy

Newsweek / Robert J. Samuelson

Why this is just the opening act.

It would be possible in other circumstances to disregard the ongoing story of Greece and its debts as a tedious tale of financial markets. But there's much more to it than that. What's happening in Greece speaks to two larger issues that affect hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency, the euro. The meaning of Greece transcends high finance.

Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, and aged. All face similar problems: burgeoning costs as populations age, an overreliance on debt financing, and pressures to reduce borrowing that create parallel pressures to cut welfare spending. High debt and the welfare state are at odds. It's an open question whether the collision will cause social and economic turmoil.

Greece seems the opening act in this drama; already, its budget problems have spawned street protests. By the numbers, Greece's plight is acute. In 2009, its government debt—basically, the sum of past annual deficits—was 113 percent of its economy (gross domestic product, or GDP). The budget deficit for 2009 was 12.7 percent of GDP. Two thirds of the debt is owed to foreigners, reports the Institute of International Finance.

The crisis originated in fears that Greece wouldn't be able to refinance almost €17 billion of bonds (about $23 billion) maturing in April and May, says the IIF's Jeffrey Anderson. If lenders balked, Greece would default on its bonds. A default would inflict losses on banks and other investors. By itself, this wouldn't be calamitous, because Greece is small (population: 11 million). But a Greek default could undermine market confidence in other euro countries' ability to service their debts. Serial defaults would threaten the global economic recovery. Most often mentioned are Spain, Portugal, and Ireland.

Preventing that is what the 16 euro countries, led by France and Germany, are now debating. Greece's adoption of the euro contributed to the crisis. For years, it enabled Greece to borrow at low interest rates, because the prevailing assumption was that the euro bloc wouldn't allow one of its members to default. It would be rescued by the others.

But in practice, a bailout is proving hugely controversial. If Greece is aided, won't other countries demand—or require—rescues? Is this possible, considering that even France and Germany have high debts and that a Greek bailout is unpopular, especially in Germany? One way to mute the problems is for Greece to embrace a harsh austerity that reduces its borrowing. Greece has already pledged to cut government workers and to raise taxes on alcohol, tobacco, and fuel. The other euro countries want more. Their dilemma is that either rescuing or abandoning Greece is a gamble.

To some economists, the dire situation makes default inevitable, though it may be a few years away. The required austerity would be too punishing, says Desmond Lachman of the American Enterprise Institute. Greece would need spending cuts and tax increases equal to 10 percent of GDP, he says. The resulting savage recession would worsen the existing unemployment rate of about 10 percent. "No sane country is going to accept that," says Lachman. Greece may get a temporary rescue, he thinks, but will someday miss debt payments and might revert to its old currency (the drachma).

Conceived as a way to unite Europe, the euro increasingly fosters conflict. No one wants Greece to default, but no one wants to pay the price of prevention. With its own currency, Lachman thinks, Greece will pursue depreciation to spur exports and economic revival. If other countries dump the euro, currency wars could ensue. But the threat to the euro bloc ultimately stems from an overcommitted welfare state. Greece's situation is so difficult because a low birthrate and a rapidly graying population automatically increase old-age assistance even as the government tries to cut total spending. At issue is the viability of its present welfare state.

Almost every advanced country—the United States, Britain, Germany, Italy, France, Japan, Belgium, and others—faces some combination of huge budget deficits, high debts, aging populations, and political paralysis. It's an unstable mix. The unpleasant choices now confronting Greece await most wealthy nations, even if they pretend otherwise.

Goldman Sachs, Greece Didn’t Disclose Swap, Investors ‘Fooled’

Bloomberg

Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.

No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.

“The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”

Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.

Legal ‘At the Time’

Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators.

The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.

Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.

Goldman Sachs earned about 735 million euros ($1 billion) underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained.

‘Fear the Worst’

The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points.

The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.

“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts.

No ‘Smoking Gun’

Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”

The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities.

“From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”

A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry.

Cross-Currency Swap

European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.

The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time.

That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.

European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Chancellor Angela Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said.

“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”