Greece’s debt woes

 European leaders are quietly considering whether to come to the aid of their troubled neighbour, Greece, amid fears that the nation might default on its debts and unleash another round of the financial crisis.
         Only a month after Dubai was rescued by its neighbouring emirate Abu Dhabi, Germany, France and other European powers are discussing whether Greece might need a bailout too.
         After a decade of debt-fuelled profligacy, Greece is confronting what amounts to a run on the bank. And, despite repeated assurances from Athens, the nation’s strained finances have put already jittery financial markets on edge.
         Some economists worry that Greece’s troubles could have deep and lasting repercussions for Europe. The crisis poses complex challenges for the euro, which Greece adopted in 2001. The currency recently sank to a six-month low against the dollar and yen.
  “Greece failing is not an option, and lots of people think that we will have to intervene at some stage,” said one European finance official, who was not permitted to speak publicly because of the sensitivity of the matter. “It doesn’t have to happen, and we hope it won’t, but it would be better than seeing a default.”
         The shape and scale of a bailout package, if any, has yet to be determined, according to officials in several European capitals. Whether the International Monetary Fund might become involved is uncertain. Some European leaders want Europe to fix this problem itself, while others are open to working with the IMF.
         Publicly, neither Greece nor its European neighbours say a bailout is being considered.
         “There is absolutely nothing to these rumours,” a German finance ministry spokeswoman, Jeanette Schwamberger, said in an e-mailed statement from Berlin. “They are without any foundation.”
         Prime Minister George Papandreou of Greece, speaking during the annual meeting of the World Economic Forum in Davos, Switzerland, said his country did not need a loan from the European Union. “We never asked for it,” Papandreou said.
         But doubts have intensified over the credibility of the drastic austerity measures put forward to try to get Greece’s budget under control, in spite of concerted efforts by the Greek government to calm the markets.
         Investors worry that the crisis in Greece could touch off a chain reaction across southern Europe. Many are fleeing bond markets in Portugal, Spain and Italy out of concern the troubles might spread.
         The market’s judgment has been swift and brutal. On January 28, the difference between the interest rates on Greek and German bonds — a measure of the risk investors perceive in the Greek debt — rose to its highest level since euro was adopted, at nearly four full percentage points.
         Officials in Athens, Frankfurt and Brussels remained adamant that Greece was not at risk of being forced to abandon the euro.
         As a condition of any aid package, the Greek government led by Papandreou would be asked to provide a more detailed program to bring the country’s deficit — currently equal to 12.7 percent of gross domestic product — under control. European Union rules call for a maximum of 3 percent. Officials insist that any bailout must not put into doubt the credibility of the euro.
             The latest moves reflect a continuing scepticism among euro-zone members over the practicality of the plans put forward so far by the Greek government. Athens wants to reduce the deficit to 3 percent of GDP by 2012, an objective described as unrealistic by one European diplomat, speaking on condition of anonymity because of the sensitivity of the issue.
         Greece’s budget deficit is four times the EU limit, while the country’s debt amounts to 113 percent of GDP. But officials insist that, because Greece is not one of the euro-zone’s larger economies, the problems created by its grim public finances can be absorbed. The Greek economy represents about 2.5 percent of the euro area’s GDP.
   On January 25, Greece paid a hefty 6.22 percent rate to borrow money in the bond market, underscoring investors’ concern.
         In a recent interview, the Greek finance minister, George Papaconstantinou, acknowledged that the high rates were punitive but asked that investors keep faith. Greece needs to raise at least 53 billion euros this year, much of it this spring.