Time Starts Running Short to Avoid a Default by Greece

by Richard Barley

Wall Street Journal
February 11, 2012

Even by the standards of the euro-zone crisis, the speed with which the latest Greek austerity package unraveled is remarkable. Less than 24 hours after Greek Prime Minister Lucas Papademos announced an agreement on budget cuts that he hoped would unlock a €130 billion ($172.7 billion) second bailout, euro-zone finance ministers rejected the proposals as inadequate.

Markets this year have been indulgent as Greece has missed deadlines to reach agreement with its creditors. But there is now a risk of a serious political accident that sends the crisis spinning out of control.

Greece and the euro zone are locked in high-stakes brinkmanship. Euro-zone finance ministers are frustrated by Greece's lack of progress on previous commitments, and wary Athens won't stick to its promises. On Thursday evening, they demanded more details on €325 million of spending cuts, a parliamentary vote to approve the measures and written pledges to support the program from party leaders. The ministers had no documents available to them when they met, so there was no basis for approval, said a person familiar with the matter.

That has put the ball back in Athens' court. Politicians there face soaring unemployment—with youth unemployment reaching 48%—and a continuing deep recession. Violence broke out at street protests Friday. Giorgios Karatzaferis, leader of the Laos party, said he couldn't vote for the reform package. Laos controls only 16 of the coalition's 252 seats in the 300-strong parliament, but this may encourage further dissent. Mr. Karatzaferis said he doesn't believe the euro zone will allow Greece to default because it fears the wider contagion.

More