A test of fire for the euro zone and Greece, the common currency's weakest link, is playing out in the financial markets.
Greece is facing a debt crunch: it must raise 54 billion euros (about $75 billion) this year or face default. Athens says it can cut its giant budget deficit and raise the money. But the markets are testing its claims to destruction.
"These six months are going to be crucial. They will be the test for us and, internationally, for our credibility," Greek Prime Minister George Papandreou said in an interview with The Wall Street Journal Thursday.
His government's race against the clock began the week well. An international bond issue to raise 5 billion euros was oversubscribed five times, allowing the government to expand the issue to 8 billion euros. The debt was expensive, but the government got the money in the bag.
Then the government became embroiled in what Greek officials are calling the China syndrome.
Greece was reported to have mandated an approach to China for money, which was interpreted in the markets as a sign of desperation.
Subsequent reports from China, denying any approach from Greece, were then interpreted as a vote of no confidence from Beijing.
In an interview Thursday, finance minister George Papaconstantinou repeated his government's denials of the stories. "We have not talked to China and no investment bank has a mandate from us to talk to China," he said. Nonetheless, prices for Greek bonds have continued to sink.
They fell further Thursday on new reports that France and Germany were preparing a bail-out for Greece. Again the government responded with strong denials.
"There is no plan B in terms of bailouts," Mr. Papaconstantinou said, adding that if the government needed to take additional austerity measures, it will.
The bailout reports hit the euro, which fell to a seven-month low against the dollar Thursday. Greek bonds were also hurt, with interest rate spreads over the benchmark German bonds widening at one point beyond four percentage points, a record.
In fact, the markets are sending contradictory signals. If a bailout is being prepared -- and many European officials assume that if Greece can't raise enough money in the markets one will be -- then the euro's fall in value makes sense. That's because a bailout would send a signal of lower fiscal discipline and would emphasize the critical weakness of the euro as a currency with a single central bank but no unified fiscal authority.
But if there is a bailout in the works, Greek bond spreads should narrow, not widen. With the big economies of the euro zone putting their financial muscle behind Greece, what would justify a four-percentage-point spread?
Faced by such contradictions from the financial markets, Mr. Papandreou let his guard drop Thursday in a public forum in Davos, where the Greek government was out in force. "This is an attack on the euro zone by certain other interests, political or financial, and often countries are being used as the weak link, if you like, of the euro zone."
Later, in his interview, Mr. Papandreou declined to elaborate on his claim, saying he saw no conspiracy. He returned to his central message: The blame for Greece's predicament lies with Greece and the key to emerging from it also lies within the country.
The government is embarking on measures to cut a full four percentage points from the budget deficit, estimated at 12.7% last year, with a raft of changes including cutting two layers out of five layers of government.
"These are major changes. In any other country, this is a small revolution," Mr. Papandreou said.
While the government embarks on efforts to rebuild the country's shattered credibility through action at home, his finance minister must also work on the debt markets. Mr. Papaconstantinou is planning trips to financial centers in Europe, U.S. and Asia, including possibly China, in February and March.
In the absence of a fully-fledged debt crisis, the crunch time comes in April. Half of the 54 billion euros it needs to raise this year must be raised in the second quarter in order for it to pay off maturing debt. It needs to raise roughly 12 billion euros in each of April and May. By June, 70% of its fund raising requirements should, if things go according to play, be in place, Greek officials say.
Yet the austerity measures being prepared elsewhere across the 16 euro zone nations, including Spain, show Greece's problems are a symbol of the euro zone's wider difficulties.
Jean-Claude Trichet, the president of the European Central Bank, insisted in Davos Thursday that the currency union's problems are no worse than those faced by other big economies in the financial crisis.
But the fact remains that much of the cost of the post-crisis adjustment will not be paid equally across the euro zone, and will be felt most harshly in a few countries, such as Greece, Spain and Portugal.
There, in the absence of the option of devaluation, governments must embark on the deeply unpopular task of cutting real wages.
Unsurprisingly, the message from governments in Davos Thursday was that this was a price worth paying for the stability of staying in the euro.
"Nobody is going to leave the euro zone, just as nobody is going to leave the European Union," said Jose Luis Zapatero, Spain's prime minister. But the fact that he felt it necessary to repeat that message led some in his audience to wonder why.
Greece is facing a debt crunch: it must raise 54 billion euros (about $75 billion) this year or face default. Athens says it can cut its giant budget deficit and raise the money. But the markets are testing its claims to destruction.
"These six months are going to be crucial. They will be the test for us and, internationally, for our credibility," Greek Prime Minister George Papandreou said in an interview with The Wall Street Journal Thursday.
His government's race against the clock began the week well. An international bond issue to raise 5 billion euros was oversubscribed five times, allowing the government to expand the issue to 8 billion euros. The debt was expensive, but the government got the money in the bag.
Then the government became embroiled in what Greek officials are calling the China syndrome.
Greece was reported to have mandated an approach to China for money, which was interpreted in the markets as a sign of desperation.
Subsequent reports from China, denying any approach from Greece, were then interpreted as a vote of no confidence from Beijing.
In an interview Thursday, finance minister George Papaconstantinou repeated his government's denials of the stories. "We have not talked to China and no investment bank has a mandate from us to talk to China," he said. Nonetheless, prices for Greek bonds have continued to sink.
They fell further Thursday on new reports that France and Germany were preparing a bail-out for Greece. Again the government responded with strong denials.
"There is no plan B in terms of bailouts," Mr. Papaconstantinou said, adding that if the government needed to take additional austerity measures, it will.
The bailout reports hit the euro, which fell to a seven-month low against the dollar Thursday. Greek bonds were also hurt, with interest rate spreads over the benchmark German bonds widening at one point beyond four percentage points, a record.
In fact, the markets are sending contradictory signals. If a bailout is being prepared -- and many European officials assume that if Greece can't raise enough money in the markets one will be -- then the euro's fall in value makes sense. That's because a bailout would send a signal of lower fiscal discipline and would emphasize the critical weakness of the euro as a currency with a single central bank but no unified fiscal authority.
But if there is a bailout in the works, Greek bond spreads should narrow, not widen. With the big economies of the euro zone putting their financial muscle behind Greece, what would justify a four-percentage-point spread?
Faced by such contradictions from the financial markets, Mr. Papandreou let his guard drop Thursday in a public forum in Davos, where the Greek government was out in force. "This is an attack on the euro zone by certain other interests, political or financial, and often countries are being used as the weak link, if you like, of the euro zone."
Later, in his interview, Mr. Papandreou declined to elaborate on his claim, saying he saw no conspiracy. He returned to his central message: The blame for Greece's predicament lies with Greece and the key to emerging from it also lies within the country.
The government is embarking on measures to cut a full four percentage points from the budget deficit, estimated at 12.7% last year, with a raft of changes including cutting two layers out of five layers of government.
"These are major changes. In any other country, this is a small revolution," Mr. Papandreou said.
While the government embarks on efforts to rebuild the country's shattered credibility through action at home, his finance minister must also work on the debt markets. Mr. Papaconstantinou is planning trips to financial centers in Europe, U.S. and Asia, including possibly China, in February and March.
In the absence of a fully-fledged debt crisis, the crunch time comes in April. Half of the 54 billion euros it needs to raise this year must be raised in the second quarter in order for it to pay off maturing debt. It needs to raise roughly 12 billion euros in each of April and May. By June, 70% of its fund raising requirements should, if things go according to play, be in place, Greek officials say.
Yet the austerity measures being prepared elsewhere across the 16 euro zone nations, including Spain, show Greece's problems are a symbol of the euro zone's wider difficulties.
Jean-Claude Trichet, the president of the European Central Bank, insisted in Davos Thursday that the currency union's problems are no worse than those faced by other big economies in the financial crisis.
But the fact remains that much of the cost of the post-crisis adjustment will not be paid equally across the euro zone, and will be felt most harshly in a few countries, such as Greece, Spain and Portugal.
There, in the absence of the option of devaluation, governments must embark on the deeply unpopular task of cutting real wages.
Unsurprisingly, the message from governments in Davos Thursday was that this was a price worth paying for the stability of staying in the euro.
"Nobody is going to leave the euro zone, just as nobody is going to leave the European Union," said Jose Luis Zapatero, Spain's prime minister. But the fact that he felt it necessary to repeat that message led some in his audience to wonder why.
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