“There is absolutely no question of a bailout and we are not discussing that with our (European) colleagues. Greece will do what is necessary to reduce its public deficit,” he said.
Investors sold down Greek debt and bank shares on Tuesday, as workers launched protests against planned austerity. The risk premium on 10-year government bonds jumped to 257 basis points above benchmark German bonds from 231 on Monday after Greek Prime Minister George Papandreou outlined his plan to slash the huge budget shortfall by curbing welfare spending and raising taxes. The Athens stock exchange lost 2.12 percent by mid-afternoon and bank shares were down nearly 3.5 percent. Analysts said the economy needed much more potent medicine.
Ratings in focus
Asked about the reaction of markets on Tuesday, Papaconstantinou said the markets were “watching us with close attention, waiting to see that the announcements get translated into action and it is evident that it is quite difficult to be convincing before that happens.” Turning to the prospect that ratings agencies other than Fitch Ratings downgrade the nation’s sovereign rating, Papaconstantinou said he hoped this would not happen.
Greece plunged into crisis last week when Fitch Ratings cut the country’s sovereign credit rating to below A grade, the lowest in the euro zone, for the first time in a decade. A team from Moody’s, which has Greece’s outlook on negative watch, was in Athens on Tuesday to meet government officials.
Euro zone leaders and most bank analysts say there is no prospect of Greece defaulting on its debt. However, the cost of insuring Greek government debt against default rose on Tuesday. European Central Bank governing council member Nout Wellink said the markets would force Greece and other problem countries such as Spain and Portugal to clean up their public finances.
‘Next Lehman Brothers’?
The president of Germany’s Ifo institute said Greece could become “the next Lehman Brothers,” the US investment bank whose bankruptcy in Sept. 2008 triggered global financial turmoil. But Hans-Werner Sinn said the euro zone would not break up due to Greece’s debt, forecast to hit 135 percent of GDP in 2011 barring policy changes. Economists forecast more turbulence for Greek markets and questioned whether some of the proposed savings would help cut the deficit to the EU limit of 3 percent of GDP in 2013.
