Europe Economy

Does Greece Need Heroic Help Now?

Hercules, Odysseus, Aeneas, Perseus, Leonidas. I love 'em all.

I had a patchy education in the Classics, my B grade Latin O Level is testimony to that, but one thing that was not missing was my total absorption into the tales of the great Greek Myths.

I was aided by the magnificent Mr. Wilson, a Latin teacher who was far happier telling us tales of Trojan wars and winged horses than making his classes recount third declension nouns. Schools aren't what they used to be!

Back to the present day and Greece is in dire need of a modern day Leonidas. The country is facing present day foes equal perhaps to Sirens, Minotaurs and snake-haired Gorgons all added together. Yes, the baying hounds of the financial markets.

Unlike Cerberus though, who by most accounts had only three heads, the markets are multi-faced creatures with insatiable and merciless appetites. Greece on the other hand, like so many of the ancient heroes, is a flawed central character and has created many of its own problems.

Only now is the true state of the country's finances coming to the fore after years of 'myth-stated' accounts (get it?). Greece's foes sense blood and its EU friends are furious.

What happens next to Greece and its position within the euro zone depends enormously on whether the socialist government can push through a series of reforms that appear Herculean in their ambition.

Prime Minister George Papandreou and his Finance Minister George Papaconstantinou must now enact an austerity program at the exact time the economy needs huge stimulus after years of lost ground.

A Culture of "Corruption"

The statistics, or at least the latest version of them, show Greece suffered a budget deficit of 12.7 percent in 2009,  current unemployment of nearly 10 percent, negative expected GDP for 2010 and public debts equivalent to as much as 120 percent of GDP.

In addition, Papandreou admitted last month that the country has a culture of "corruption" and tax evasion, which is hampering efforts to raise tax receipts.

His austerity plans hinge on both the cutting of Government spending and the increase of tax revenues. The red pen will be taken to military spending budgets, hospital expenditure.

On the revenue side tax hikes for the richer echelons of society and a crackdown on evasion will be go together with higher taxes on alcohol and tobacco.

These measures will be accompanied by moves to drastically overhaul the pensions system, make a 10 percent cut in social security spending and slap a huge tax on private banker bonuses.

The government says this will bring Greece's budget deficit back below the key 3 percent level within three years and says, in 2010 alone, the deficit will be shaved by 4 percentage points to leave it below 9 percent of GDP.

If they achieve these goals, then it will be a stunning achievement, but the problem is as simple as that posed by the ancient Spartans in the face of overwhelming enemies – IF.

Recipe for Massive Deflation?

RBS's Alan Ruskin last week laid bare the Olympian heights the Greeks will have to climb if they are to succeed:

"…there are very few examples of a developed country achieving anything like an improvement on the cumulative scale of 10 percent of GDP in 3 years…I can find no data in the last 35 years where an OECD country has come close…not least through fiscal austerity that starts in the middle of a recession!"

In addition, Ruskin points to huge unintended consequences:

"The austerity package with tight monetary policy is a simple recipe for massive deflation. If credibility is an issue, ask how the Greek population is likely to take to this unprecedented adjustment? Not kindly I would suggest."

So Greece has set in motion plans to rectify the ills of the economy but will it, like Atlas, have to stand alone with the world on its shoulders?

Yes, according to Jean-Claude Trichet. The ECB President last week harshly pronounced: "No Government or state can expect from us any special treatment," adding later on: "We will not change our collateral framework for the sake of any individual country."

But is Monsieur Trichet's hardball stance just an opening gambit in what will be a prolonged high stakes game of poker with the credibility of the whole Euro project on the table?

Many commentators believe the euro zone and the wider EU cannot afford a Greek default for fears that the markets will turn their attention to the likes of Portugal, Spain, Ireland and beyond. The domino theory is alive and well.

So Greece's rehabilitation is, despite all the anger at the past statistical inaccuracies and the rhetoric condemning the country to its own fate, a bigger collegiate affair.

In classical terms it is going to be akin to the cleaning of the Augean stables, a messy, mucky task of Herculean proportions. And in similarity to Hercules, time is ticking for our central character. He had only one day, Greece has not much more to regain its credibility and slay the markets.