Greece on verge of default as doubt grows over bailout

Greece’s embattled prime minister, George Papandreou, has moved to counter growing fears that Athens is about to default on its debts, saying there was a clear route back to economic health.

Speaking amid high security as protesters converged on the northern city of Thessaloniki for its annual international trade fair on Saturday, the socialist leader said: “There are two paths. One is the path of major change that will lead to a productive and creative Greece.

“The other path, the supposedly easier one, does not look problems straight in the eye and leads to disaster. We insist on the path of change.”

Despite strong denials that the country is heading for a default, rumours have grown that the end game is approaching. Wolfgang Schäuble, the German finance minister, has insisted that a sixth, €8-billion instalment of aid will not be released unless Greece enacts corrective measures to kickstart its economy and improve competitiveness. Experts from Washington and Brussels will fly into Athens this week to assess whether Greece is sticking to its programme of drastic spending cuts and tax rises, amid fears that its creditors could be ready to pull the plug.

Share prices plunged on both sides of the Atlantic on Friday, as Athens was forced to deny that it would default, perhaps as soon as this week. The Dow Jones closed more than 300 points down, while in London the FTSE100 lost more than 2% of its value.

A team from the so-called “troika” of the IMF, the European commission and the European Central Bank, which bankrolled the Greek rescue deal last May, are due to rule by the end of the month whether it should receive the latest €8-billion tranche of the bailout.

The troika left Athens at the start of this month after talks with the government broke down. Papandreou has faced down riots on the streets to pass a series of austerity Bills, but the country’s creditors accuse him of dragging his feet over job cuts in the civil service and the privatisation of €50bn-worth of state assets. Greece’s plans have also been blown off course by the worse-than-expected performance of its recession-hit economy, which is now expected to shrink by up to 7% this year.

Without the €8-billion, Athens will be unable to meet repayments due on its bonds. At the same time, Europe’s finance ministers, who gathered with their G7 counterparts in Marseille on Saturday, are still wrangling over the details of a second, €109-billion rescue package for the embattled country.

The ministers sought to calm world markets by repeating their pledge to do everything necessary to secure recovery, but there were no new details of concrete measures.

“There is now a clear slowdown in global growth. We are committed to a strong and coordinated international response to these challenges,” they said.

‘Game of very bad taste’
As the euro plunged to its weakest level in six months on Friday, Athens issued a statement describing the latest rumours as “a game of very bad taste, an orchestrated speculation that is targeting the euro and the euro area as a whole”.

The latest sell-off in financial markets came after a rumour emerged that Germany was drawing up plans to protect its banking sector in the event of a Greek default. A series of other key measures, such as new powers for the eurozone-wide rescue fund, are awaiting approval by national Parliaments. But insiders say both IMF boss Christine Lagarde and German chancellor Angela Merkel are coming round to the view that Greece must be allowed to go bust. The IMF, in particular, is said to have become convinced that Greece’s debts are unsustainable.

If it passes this week’s test, Greece faces another progress check in December. “My understanding is that in December it’s much more likely the plug will be pulled,” said a source close to the troika.

That could prompt other struggling euro members, including Portugal and Ireland, to demand reductions in their own debt burdens, and increase fears that the single currency area is close to collapse. Friday’s anxious mood was exacerbated by news that ECB director Jürgen Stark, who had been sceptical about its policy of buying up Italian and Spanish bonds to restore calm to international debt markets, had resigned.

Stark, with Bundesbank boss Jens Weidmann, had toured German media outlets criticising the bank’s policy. A furious outburst from ECB president Jean-Claude Trichet on Thursday, in which he said Germany should be grateful for the low inflation it had achieved through euro-membership, was seen by many observers as an attack on Stark.

“Overall, Mr Stark’s departure could be seen by financial markets as another indication of growing disenchantment in Germany towards the euro,” said Julian Callow, of Barclays Capital.

But Erik Britton, of City consultancy Fathom, said it was good news if Germany was preparing its banks for the debt restructuring which a growing number of observers see as inevitable.

“If they are drawing up a plan to protect the banks, it’s not before time,” he said. “[Greece] will default, it’s just a matter of time — but the bad scenario would be if we got a messy default.” –

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Helena Smith
Helena Smith works from Athens. Helena Smith is the Guardian's correspondent in Greece, Turkey and Cyprus Helena Smith has over 7053 followers on Twitter.

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