Europe Economy

The 5 Billion: Greece's Epic Battle Against Debt

Guy Johnson|CNBC Anchor

This is war! That was the message from Athens Wednesday as the Greek government tried to combat the debt threat that hangs over the country.

The near €5 billion ($6.85 billion) mix of a pension freeze, public sector pay cuts and tax hikes is unlikely to be popular, but Prime Minister Papandreou has little choice and the country knows it.

The polls show that most people are giving him and his team their grudging support. That doesn't mean that there won't be protests. On Wednesday, it was the pensioners and on Thursday unions plan to demonstrate outside the Parliament.

Critically the markets are giving the thumbs up to the austerity announcement. The spread between Greek bonds and their German equivalents narrowed and the euro rallied Wednesday. But there is a long way to go and markets also seem to be on board with the euro rallying on the back of the news.

Greece still faces a long and bumpy road to reach greater credibility. While the markets are giving the country the benefit of the doubt for now, any sign that domestic pressure is weakening its resolve will be taken very badly and Papandreou is aware of this.

Consequently, he wants the support of the rest of the euro zone. The last couple of days have seen him make some tacit threats that Greece can cause trouble unless it gets some help. Not only has he said that it would be a catastrophe if Greece was unable to borrow at the same rate as its European partners, but that if help is not forthcoming then he could turn to the International Monetary Fund. That would be a big blow to the credibility of the euro zone and a move many of its members would like to avoid.

Indeed, many senior figures within the currency bloc seem to be on board with the idea of helping Greece. The exception is German Chancellor Angela Merkel. She has once again said that there will be no aid and as far as she is concerned the issue is not even on the agenda for her meeting with Papandreou on Friday. I suspect the Greek Prime Minister has a different view.