"Markets have been patient with Greece in the past," says David Schnautz of Commerzbank. But their patience with Greece's chronic fiscal problems and rocketing public debt is running out. "Neither the Greek government nor the Greek population seem prepared to do much" about the problem, says Michael Riddell on Bondvigilantes.co.uk.
Credit-default-swaps prices, which reflect the cost of insurance against a sovereign default over the next five years, imply that Greece is now a bigger risk than Colombia. The government's cost of borrowing is rising. Since the beginning of the month, the difference in yield between the Greek ten-year government bond and its safe German counterpart has jumped from 1.4% to 1.8% as Greek bonds have been sold off.
After October's national election, the new Socialist government shocked the markets by doubling the official forecast of this year's budget deficit to 12.7% of GDP the largest in the eurozone. It promptly accused the previous administration of fiddling the figures. It's not the first time. In 2001 Greece fudged its budget deficit figures in order to qualify for the euro.
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Ratings agency Fitch has downgraded government debt. And following a "less than credible" new budget, which contained few spending cuts or tax rises, sentiment has worsened, says Riddell. The EU Commission says Greece has taken "no effective action" and public debt is on track to rise to a staggering 135% of GDP in 2011 without serious action.
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"Good luck," says Ambrose Evans-Pritchard in The Daily Telegraph. Shipyard workers have already been involved in fights with the police; a proposed pay freeze for public-sector workers has triggered a Socialist Party revolt. "There is enormous denial," says Lars Christensen of Danske Bank. People "don't seem to understand that very serious austerity measures are needed".
Compounding the jitters over Greece, in another illustration of how it's been living beyond its means, is the high current-account deficit. This reached 14% last year, says Goldman Sachs, because Greece is particularly dependent on external funding. The ongoing recession the OECD expects the economy to keep shrinking next year doesn't help either. In addition, the Bank of Greece has warned lenders that they must wean themselves off cheap emergency funding from the European Central Bank, as this will eventually be withdrawn.
That raises the prospect of higher funding costs for the Greek banking system and could dent demand for government bonds. Cheap funding costs have encouraged Greek banks to load up on government paper, which they use as collateral for much cheaper loans, pocketing the difference in interest rates.
Greece looks stuck, says Evans-Pritchard. And as it is in the eurozone, it can't devalue its currency to bolster growth and restore competitiveness after years of "unfunded welfare largesse". It can't print money either. Market-enforced austerity now means it risks "grinding deeper into slump" and ending up in a compound debt spiral. At that point just servicing interest on government debt becomes more and more difficult.
As the threat of a crisis mounts, Greece can't count on its EU partners to come to the rescue, says The Economist, because they are angry at its "persistent laxity". And, of course, having gone deep into debt to temper the effects of the recession, they have "enough troubles of their own".
