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As Eurozone Finalizes Greek Package, Fears Mount It's Too Little Too Late


Demonstrators shout slogans near the Greek parliament building during a protest in Athens on May 4.
Today was supposed to be a good news day for the Greek financial crisis.

That is because eurozone leaders are meeting in Brussels today to finalize a rescue package that just a week ago looked like it could bail out Greece successfully.

But now, even as the Brussels meeting is expected to approve the 110 billion-euro ($140 billion) rescue package for Greece, the mood in financial circles is depressed and worsening.

The reason is that many investors feel the bailout is too little, too late. So they are fleeing the eurozone and its common currency even as the rescue package is intended to persuade them to stay.

Greek Prime Minister George Papandreou acknowledged the fears today as he arrived for the emergency summit with eurozone leaders in Brussels.

"There is unprecedented volatility throughout the world, in the world economy. That is why today's meeting here in Brussels is so important," he said. "We will reaffirm our confidence in our economies and our common currency. And this, I believe, is a very important message for the global economic recovery -- a recovery that will bring back growth, jobs, welfare to our people, to our citizens in our countries, and to all of Europe. We can do this. We must do this. We will do this together."

Over the last three days, the value of the euro has plunged to reach a 14-month low of $1.25 on May 6. It later crept upward again to $1.27, but only on news that the finance ministers of the world's seven richest nations, the Group of Seven, will discuss Greece's bailout in a telephone call later today.

Similarly, stock markets around the world have seen waves of selling as investors try to move their money to safer havens. The selling and a suspected trading glitch drove U.S. stocks down 9 percent on May 6 before a partial recovery at day's end.

Crisis Of Confidence

Financial analysts say that the crisis of confidence among investors in many ways resembles the mood ahead of the financial crisis of 2008-09. Then, lending came to a halt and governments had to intervene to provide liquidity amid worries about banks' exposure to real estate and consumer debt. Today, there are concerns about banks' exposure to government debt in several EU states -- not just Greece.

Jean-Claude Trichet, president of the European Central Bank
"The overall problem here is one of increasing worries in financial markets over the solvency of a number of European states," says Lars Christensen, head of emerging markets research at Danske Bank in Denmark. "Obviously, Greece is on top of the agenda, but there are also significant market worries about the situation in Spain and in Portugal. And also, of course [about] the risk of contagion via the banking sector.

"Increasingly, markets are getting nervous about [bad debt] risk, of who has exposure, what banks, what countries have exposure to Greece, to Portugal. So that way it resembles what we saw in the financial markets in late 2008, early 2009."

For many investors, the problem with the Greek bailout is that it comes with no certainty Greece can ultimately recover without defaulting on or restructuring its debts.

The bailout is accompanied by stringent demands upon Athens to cut back government spending, raise taxes, and raise productivity. But the riots in Athens that have greeted these conditions, including three deaths when a bank was set on fire on May 5, have raised doubts about the ability of any Greek government to carry out the needed reforms.

That raises the prospect that Greece could end up still more deeply in debt three years from now, when the bailout program concludes, than it is today. If so, creditors would eventually be forced to accept less than they are owed.

Trigger A Wider Panic

The most immediate worry now is that investors' fears about Greece will trigger a wider panic about investing in other eurozone countries that have weak economies, such as Portugal, Spain, and Ireland.

All three countries have high annual budget deficits, raising fears that they, too, might ultimately default on their debts. In the past weeks, the rate these governments must pay investors to borrow money has risen steadily. Spain's rate for 10-year bonds, for example, rose to 4.2 percent on May 6 from 3.8 percent just a month ago.

Antigovernment protests in Athens turned violent and deadly on May 5
But it is not only the weaker eurozone countries that are worried. Much of their debt – like that of Greece – is held by banks in the eurozone's richest countries, such as France and Germany. And that is enough to make anybody with money in these banks nervous that their money, too, is at risk, even though the French and German economies are healthy.

Beyond the Greek bailout, what many in the financial markets would like to see is a strategy to comprehensively address the European government debt problem.

Hopes Dashed

Many investors in recent days have hoped to see signals from the European Central Bank (ECB) or Europe's governments that they would intervene to buy up banks' holdings of bad sovereign debts if necessary. That would guarantee that Europe's debt problems do not spiral into an ever wider bank-credit crisis that could spread across global markets.

But the ECB appeared to dash such hopes on May 6. President Jean-Claude Trichet said the bank's governing council had not even talked about a possible purchase of eurozone government debt during a meeting in Lisbon. He stressed the ECB is "inflexibly attached to price stability," a signal that he wants to avoid any measures that would inject money into the eurozone economy at the risk of triggering inflation.

Christensen says this leaves financial markets wondering where help will come from if more help is needed. And making the markets still more nervous is the knowledge that -- after the recession of 2008-09 -- publics everywhere have little enthusiasm for new and expensive rescue packages to bail out investors.

"There is also undoubtedly some, let's call it, rescue or bailout fatigue -- that political opposition to bailing out banks, companies, and countries is clearly rising," Christensen says. "It's not easy to find support in any country for taking taxpayer's money and shipping it to bail out another country, even if the purpose is to save the euro."

Both houses of the German parliament today approved the country's 22.4-billion-euro ($28.5 billion) contribution to the Greek bailout package.

But German Chancellor Angela Merkel had to wage a fierce battle to convince the lawmakers to pass the highly unpopular measure. She succeeded partly by arguing that the eurozone must defend its common currency in the absence of any other clear alternative.

Merkel said that would be one of the priorities at the Brussels meeting.

"I hope for a push for the G20 to work on more regulation for financial markets," she said. "It's also important that all countries -- including Germany -- do their homework on the Stability and Growth Pact. We will address this, too, [in Brussels]. Furthermore, it's important that there be a clear message to secure our common European currency."

But if the argument succeeded this time, there is no guarantee German voters could be persuaded to rescue Greece a second time, or any other ailing eurozone state a first time. And that makes Europe's current economic crisis one whose outcome only grows day by day more difficult to predict.

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