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Jun 17, 2011, 11.42 AM IST | Source: Reuters

Source of Greek crisis? A nation in denial

European leaders are scrambling to save Greece from a debt default that could cause global economic turmoil, but the Greeks themselves seem in denial.

Source of Greek crisis? A nation in denial

European leaders are scrambling to save Greece from a debt default that could cause global economic turmoil, but the Greeks themselves seem in denial.

In a reaction that is causing frustration and anger abroad, the Greeks seem more inclined to blame others for their troubles than accepting that something is deeply wrong with their country and painful medicine is urgent.

"The ordinary people don't understand the seriousness of the situation...not only for Greece, but for the whole world economy," said Jan Randolph, director of Sovereign Risk Analysis at IHS Global Insight.

Violent protests against austerity measures demanded in return for an international rescue worth billions of dollars have combined with political infighting and euro zone dithering to severely spook international markets.

No single element of society appears to have fully embraced the gravity of the situation, analysts say, and investors fear political wrangling and opposition to austerity measures could push the country into a messy default on its sovereign debt, which totals 340 billion euros (USD 480.8 billion).

While countries like Latvia have taken IMF medicine, suffered quick but painful contractions, and are now on paths of recovery, analysts said Greece's case increasingly threatens to resemble Argentina, which defaulted in 2001 and is still shut out of financial markets.

Greece's bailout lenders, the European Union and International Monetary Fund, have called for national consensus behind reforms to win a new financing package but in the country itself a great deal of time is spent pointing fingers rather than looking for solutions.

Government and opposition paint each other as obstructing a solution, private company workers blame the bloated public sector, civil servants blame tax cheats and most Greeks say corrupt politicians are the main problem.

"The big problem of Greek society is the tendency to consider somebody else is responsible for everything that goes wrong," said Theodore Couloumbis, of the ELIAMEP think-tank. "It's like someone who suffers from a severe disease and wants to know what caused it rather than taking precautions to cure it."

Painful measures

The government has reduced public sector wages by a fifth, raised the retirement age for women, cut pensions by more than 10%, and cut temporary public contract jobs.

But the underlying budget problems remain. Tax evasion is still rampant -- the labour minister has estimated a quarter of the economy pays nothing -- and loss-making public firms cost the state 13 billion euros from 2004 to 2009, their workers virtually immune from being fired.

"Ninety-nine percent of the Greeks' problems are of their own making," said Randolph. "If everyone had been paying their taxes, we wouldn't have a budget deficit this high."

Greeks are upset with austerity and in a poll held last month, 80 percent of respondents said they refused to make any further sacrifices to get more EU/IMF aid. [ID:nLDE74K08V]

Workers at banks and state utilities heading for privatisation, public sector contractors, and even doctors have taken to the street of Athens in almost daily protests to oppose deregulation, sell-offs and liberalisaton of a highly bureaucratic economy. Those demonstrations turned violent on Wednesday.

Analysts say another problem is that Prime Minister George Papandreou's government appears to have failed to explain to the public how desperate the situation is -- that default will have a major impact not only in Greece but beyond its borders.

French and German banks have the most exposure to Greek debt. If Greece went under, market pressure would increase on other indebted euro zone countries such as Ireland, Portugal and maybe Spain.

A confusing internal political battle seems to have compounded the problems, with Greek politicians still eyeing a domestic audience rather than thinking of the broader picture.

That may have played a role on Wednesday, when Papandreou initiated and then broke off talks with the conservative opposition on creating a unity government to push through new austerity measures. He later announced he would reshuffle his cabinet instead, adding to international jitters.

Pundits said there was a small chance Papandreou thought a unity deal was possible, although the conservatives have for months demanded the renegotiation of Greece's 110 billion euro bailout from the EU and IMF last year.

"I can't believe they are doing this with all the money they are being offered," one frustrated European Central banker said.

Papandreou may also have wanted to scare wavering deputies into voting for the new five-year, 28 billion euro austerity package that is an IMF and EU condition for continued aid.

"The real risk to the next package is coming from within Greece itself," J.P. Morgan wrote in a research note.

"The prime minister is losing support within his own party, and there is huge conflict across the political spectrum and the population as a whole."

Disaapointment in Europe

The confusion roiled markets globally and shocked European Union officials who have appealed for Greece's political elite to unite behind the reforms.

Analysts said it looked as if Greece was drifting away from a Latvia-style situation. The Baltic state took an EU-IMF bailout in 2008 to avoid bankruptcy.

It imposed spending cuts and tax hikes worth about 15% of gross domestic product over three years, including wage cuts for teachers and health workers of up to 50%.

The measures triggered an 18% economic contraction in 2009 but Latvia's economy began growing again last year and it has returned to borrow on international markets.

By comparison, Greece managed to cut its budget deficit to 10.5% of GDP last year, from 15.4% in 2009. But it has fallen behind on the targets it has agreed with the EU and the IMF, a result that led to the cabinet agreeing to the new belt-tightening campaign that sparked the protests.

Markets are sceptical that Greece can be saved, not least after Wednesday's violence.

Combined with resignations by several deputies from Papandreou's party and persistent differences between euro zone policymakers trying to arrange further aid for Athens, some analysts see the chances of a messy default rising.

"The protests are not going to go away and the Greeks can't deliver ... it looks like you're seeing growing divisions between the IMF, EU and ECB," said David Lea, western Europe analyst at Control Risks.

"I think we're moving inexorably to default."

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