Is there any way out of Europe's debt morass?
Greece's efforts to restore confidence in its finances have only called attention to its woes, and now investors are fretting debt contagion could spread to other countries, starting with similarly troubled Portugal, but with markets wondering who's next.
Some experts believe a bailout may be needed to prevent a continental conflagration — but EU leaders resist the idea, while going cap in hand to the International Monetary Fund would be a humiliating step they're unlikely to take.
A growing chorus of voices is predicting a less dramatic, but potentially more corrosive, outcome: a years-long grind of fiscal pain that neither plunges Greece into default nor restores its finances to health.
As it denies the possibility of a bailout, the EU has been desperately voicing its confidence in Greece's ability to contain spending and pay down debt in the hopes that investors will give the country a break and stop betting on its fiscal demise.
A number of investors now appear inclined to think the politicians will go to any length to avoid the humiliation of a member state going bust or being bailed out, by the EU or by the IMF.
The result may leave Greece and other debt-plagued countries in the 16-member euro zone in limbo — without the boost of a bailout or the catastrophe of a default, but stuck for years in an uphill struggle to gets its finances straight that will mean lower salaries for many workers, especially those in public jobs, plus higher interest rates and less chance that governments can spend to stimulate their economies.
David Jones, chief market strategist at IG Markets in London, believes that after last week's sharp sell-off in equities, when markets were evaluating the risk of default and the possibility of contagion across the eurozone, investors are now turning to the view that the debt crisis will become a long-term burden — both for Greece and the wider eurozone.
"Markets are coming to terms with the fact that it's going to be a long process," said Jones.
The bigger danger: high interest rates that will sap spending for years, as indicated by the roughly 3.5 percentage point spread in the markets between Greek bonds and those of Germany, considered a benchmark of safety.
"I have yet to meet an investor who thinks Greece will default," said Jones. "They are mostly concerned that the spreads will remain elevated."
Greece's figures — a budget deficit that rocketed to 12.7 percent of annual economic output in 2009, four times above the EU limit, and a national debt of more than 113 percent of GDP — have alarmed the country's EU partners and international markets, forcing a spike in borrowing costs for Greece and other weak European economies and pushing down the euro exchange rate.
There are also fears the troubles could spread. The PIGS (Portugal, Ireland, Greece, Spain) are in obviously in trouble, but debt levels are sky high in countries typically considered more solid: Italy is at 127 percent and Belgium at 105 percent. Austria's banks have troublesome exposure to recession-hit Eastern Europe.
As well, Greece, along with Portugal, Spain and other countries with deficit trouble, may find that unions and voters push back against cutbacks that will take years to show results. With a potential public backlash, their chance to win approval for such measures remains unclear.
"Failure is not certain. But success is also not certain, and if I look at financial markets, they seem to be saying that the possibilities are about even," said Daniel Gros, director of the Brussels-based Centre for European Policy Studies.
Finance Minister George Papaconstantinou says a new tax bill to be presented this week will expand the top 40 percent tax bracket to incomes below the current euro75,000 ($102,000) threshold. He hopes to raise nearly euro4 billion in extra taxes this year, and an additional euro1.2 billion from a crackdown on the country's notorious tax evasion.
But the measures have met with resistance already. Civil servants are to strike on Wednesday, and their main umbrella union, ADEDY, warns it could call for another strike next month, depending on what the new tax bill will say. Greece's umbrella private sector union plans a separate 24-hour walkout Feb. 24.
"That is the problem. One sees for the moment only strikes, one does not see yet the willingness of everybody to contribute," Gros said. "Usually this recognition that the crisis is serious and everybody has to make a sacrifice comes only when the economic situation is really very bad for some time, and visibly bad ... but that seems not to be the case yet in Greece."
Athens insists it can weather the storm alone — although it has not ruled out accepting some form of help.
"We will overcome the crisis on our own," government spokesman Giorgos Petalotis said Monday. "But we are a member of the European Union ... and European solidarity exists."
The EU opposes an IMF bailout because it would deliver a blow to the sovereignty of the monetary union, but they have also little willingness to raise funds for a bailout, said Stephen Lewis at Monument Securities in London.
Some argue it would also only be a temporary help.
"The IMF anyway would postpone only the problem, because in the end the problem is one for the eurozone," Gros said.
Economists believe eurozone officials hope to duck the most politically difficult decision-making and simply wait for markets to tire of attacking Greece and other weak governments as it becomes clear that no member state will be allowed to default — but that these countries will face the pain of tough fiscal measures for years to come.
"The political leaders of the EU have so far failed to signal what they would do in the event of investors shying away from Greek debt at any price, as happened with Hungarian and Latvian debt in 2008" Lewis said. Both Latvia and Hungary were bailed out by the International Monetary Fund.
One of the reasons politicians are loathe to discuss a bailout scenario is that once one country is rescued, markets would be tempted to simply move on to the next weak link in the eurozone economic chain. Avoiding so-called "moral hazard" would be key to avoid opening a Pandora's box of bailouts reminiscent of the past years' banking crisis.
David Owen, chief European financial economist at Jefferies Fixed Income in London, notes that an alternative to an outright EU bailout would be debt guarantees by the ECB, which throughout the credit crunch has been the main center for crisis management.
"The ECB has shown to be fairly pragmatic, and they would provide liquidity on demand to Greece if things got worse or it got downgraded further," Owen said.
He said investors' real fears were not of default, which they've come to realize is a political impossibility, but that Greece might have to pay higher interest rates for a long time. That would be a slow, drawn-out punishment for Greece over a span of years, hindering growth even as other countries enjoy recovery.
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