Greece: A Litmus Test for the EU Economy

Despite Greece’s successful fundraising on the markets, stock exchanges remain uneasy regarding European public finances.

Despite its bankruptcy status, Greece continues to find lenders for its sovereign debt. Late last week, the country successfully raised 5 billion euros on 10-year bonds. Demand was even three times higher than the supply. However, it had to pay a premium: at 6.30%, the offered rate is very high for sovereign debt, and twice what Germany must pay.

The loan came on the heels of a new round of austerity measures for the Greek economy. ” *The new measures do not alter the initial savings objective; therefore, there was still room for improvement within this plan*“, says Christian Parisot, economist at Aurel.

However, this successful operation is not without its risks. The social unrest experienced by the country demonstrates the difficulty of implementing such measures. Analysts note, however, that the population is reacting with a certain sense of fatalism, and markets have not shown particular signs of panic. The inverse risk would be that the adopted austerity plan plunges the country into a long-term slump, once again making it unattractive to investors.

« *In reality, even if the markets are not yet aware, ever since European heads of state affirmed their solidarity with Greece, the crisis is already over*, believes Christian Parisot. Because behind the cases of Greece and a few “bad students” of the eurozone (Spain, Portugal, and Ireland) whose public finances are deemed dangerously unbalanced, it is the cohesion of the European bloc that markets are testing. This is evidenced by the euro falling to 1.36 dollars. The single currency has lost 10% of its value against the greenback since November. *With a single currency but no fiscal federalism, the European economy finds itself operating on one leg*, analyzes René Defossez, interest rate strategist at Natixis. *They were nonetheless provided with prosthetics, subject to specific convergence criteria.* » However, these criteria do not constitute a full-scale common economic policy. Even without reaching such a level of pooling resources, European leaders are nonetheless seeking to provide reassurance regarding the Greek situation.

However, the necessary measures are not easy to define. Direct financial aid would be interpreted as a sign of an even more complex financial situation for Greece, potentially fueling further market panic. Furthermore, other eurozone countries—led by Germany—are concerned about the “moral hazard” such a bailout might create. Instead, European leaders are focused on conveying messages suggesting that a form of solidarity would be available in the event of hardship.

Last Sunday, Nicolas Sarkozy announced a ” concerted initiative » to combat « speculation » currently targeting Athens. An exit from the eurozone would indeed be catastrophic for both Greece and Europe. *The country would immediately default and be placed under the supervision of the IMF. Meanwhile, Europe would come under intense market scrutiny, as investors look to identify the next struggling economy in the eurozone.*“, believes René Defossez.

The situation is not yet quite as dramatic. However, it remains quite sensitive for the other so-called “PIGS” countries (Portugal, Ireland, Greece, Spain), which must also pay higher rates to refinance their debt. ” *Spain is facing a combination of declining competitiveness, skyrocketing unemployment, and a government that has lost its popularity*, comments René Defossez. Austerity measures have been adopted, as they were in Ireland. Portugal is expected to present the details of its austerity plan in mid-March.