Home News Greece admits crisis, promises urgent budget action

Greece admits crisis, promises urgent budget action

Published on 10/12/2009

Athens -- Greece revealed on Wednesday that it is working on radical action to reverse a deepening financial crisis which is straining eurozone cohesion and focusing market anxiety on emerging economies.

"I can assure you that the government will do whatever is required to regain this lost credibility," Finance Minister George Papaconstantinou told journalists.

He was reacting to a string of blows from credit rating agencies and tough words from top EU officials, and to clear signs of a loss of confidence on financial markets.

"We are not waiting for anyone to save us," the minister retorted on Wednesday. "We are not a new Iceland, just like we are not the new Dubai."

Greek shares fell sharply for a second day, and the problems here were also spotlighted by new debt strains in Dubai. These two crises have undermined confidence in weaker emerging markets, and in Russia the ruble slumped.

Shortly after the minister spoke, the Fitch ratings agency landed another blow by putting all of the structured financial deals which it rates in Greece under negative watch.

The problems in Greece and Dubai are alarming financial markets and are also revealing deep tensions within the eurozone.

"Whether or not the (ratings) downgrade turns out to be just a Greek Tragedy or one that has impact over the whole of the Eurozone and hence the euro will depend on whether yesterday’s (Fitch) action sparks a domino effect that leads to downgrades for other Eurozone countries, or even dare I say it, the UK," said Calyon analyst Stuart Bennett.

Greek policy so far contrasts with action in two other heavily deficit-burdened countries, Britain and Ireland which were announcing deep cutbacks on Wednesday.

Many analysts interpret comments from top European officials as a warning to Greece that it cannot count on being helped out of its debt and confidence crisis, without demonstrating that it is taking tough corrective action.

French Finance Minister Christine Lagarde said that Greece was not on the verge of financial collapse, but stressed that the Greek government had made promises to EU members which it now had to respect.

But Swedish Finance Minister Anders Borg suggested that European countries were not inclined to help Greece out of its budget crisis and urged Athens to "apply serious budget policies."

His remarks followed unusually strong comment from the head of the European Central Bank, Jean-Claude Trichet on Monday, saying that the state of Greek public finances was "very difficult" and that "courageous" corrective action was needed.

"The recession that has been raging in Europe since the middle of 2008 has exposed those countries with weak government finances," said Rabobank analysts in a note to clients.

The Greek credit rating problems also highlighted a danger that Greek banks, some of which were also downgraded on Tuesday, are at risk of not being able to borrow from the European Central Bank under normal terms.

Greece’s fledgling socialist government is labouring to rein in a ballooning budget deficit and a massive debt under mounting pressure from the European Commission.

But doubts are growing on whether it can pull this off with the dire state of Greek finances complicating the fresh raising of loans to cover overspending.

On Tuesday, Fitch downgraded Greek long-term debt ratings because of "the weak credibility of fiscal institutions and the policy framework." Standard & Poor’s has warned it could follow suit.

Papaconstantinou acknowledged on Wednesday: "It is clear that the downgrading from international agencies complicate the government’s task."

But the government has insisted that it can still obtain the cash it needs.

"For the moment we are borrowing at a higher price but there is no lack of liquidity on the market," Papaconstantinou told CNN in an interview on Tuesday.

Greek newspapers warned the socialist government now has little room for manoeuvre.

"As developments demonstrate, regaining our lost credibility does not suffice. We must also achieve it as fast as possible," said pro-government Ethnos daily on Wednesday.

The Athens stock market closed down 6.04 percent on Tuesday after the Fitch downgrade, and opened with a further loss of over two percent on Wednesday.

Analysts here have called for bold spending cuts, including a wage freeze in the country’s civil service.

But the recently elected socialist government is wary of alienating unions as it prepares to unveil a controversial pension reform, and in view of violent unrest last weekend.