It has been an awful December for Greece. First, anarchists rioted to mark the first anniversary of the killing of 15-year-old student Alexis Grigoropoulos by the police. Then, the violence was overshadowed by an even more dangerous situation: a deepening fiscal crisis.
After years of ignoring its red-ink-drenched balance sheets, the country is being crushed by a mountain of unpaid bills. Its debt, now at US$440 billion, is expected to reach 124.9 per cent of GDP in 2010, the highest in the eurozone. And the deficit, at 12.7 per cent of GDP, is well above the EU cap of three per cent. On Dec. 8, Fitch rating agency cut Greece’s long-term debt rating from A- to BBB+, just above Iceland, which is in economic meltdown. Fitch analyst Christopher Pryce told Bloomberg that he’s “not convinced that the cabinet, even the prime minister, understands just how severe the situation is.”
Clearly worried about how Greece’s crisis will affect the rest of the continent, European Central Bank chief Jean-Claude Trichet told Prime Minister George Papandreou to undertake “very difficult, very courageous but absolutely necessary measures.” Because Greece uses the euro, it can’t employ the usual debt-crisis tools of devaluing its currency or printing more money. The only options are to take a machete to its spending and to hike taxes. Financial markets are so unsure about the government’s resolve that default insurance on Greek debt has skyrocketed in price.
Willem Buiter, Citigroup’s incoming chief economist, believes that without radical austerity measures, Greece may indeed default on its debt. In turn, that could get Greece bounced from the eurozone. Perhaps a fitting result, considering Athens lied about its finances to get accepted into the club. “It’s five minutes to midnight for Greece,” Buiter says.