Europe Economy

Greece Austerity Deal Runs Into Trouble Once Again with AP and Reuters

After appearing to be resolved, Greece's bailout is unraveling again.

Greek protesters threw stones and firebombs at riot police who responded with tear gas in Athens on February 10 as clashes erupted on the sidelines of a protest against new austerity cuts.
Aris Messinis | AFP | Getty Images

The bailout was put on hold late Thursday by Greece's partners in the 17-nation euro zone, while the leader of a small partner in the country's coalition government said he would vote against the demanded austerity measures.

Meanwhile, striking Greek workers took to the streets of Athens Friday to denounce the new wave of austerity as an imposition too far by Europe and the IMF.

The renewed fears of a Greek default, which could send shockwaves around the global economy, dented sentiment in the markets Friday.

Wall Street skidded following three straight days of gains, while European shares also tumbled. The euro fell sharply against the dollar, while Treasury bond prices rose.

The prevailing view remains that a deal will be cobbled together, but the uncertainty is still weighing on financial markets.

On Thursday, the feeling surrounding Greece was very different. Following weeks of discussions, the Greek government appearedto have done enough to pacify creditors.

Greek Workers on Strike

Greek Prime Minister Lucas Papademos and heads of the three parties backing his government agreed to deep private sector wage cuts, civil service layoffs, and significant reductions in health, social security and military spending.

Investors breathed a sigh of relief that the agreement would allow Greece to get a 130 billion euro ($173 billion) bailout package and avoid a bankruptcy next month that could send shockwaves around the financial markets.

But finance ministers from the other 16 eurozone states threw up a roadblock late Thursday and insisted that Greece had to save an extra 325 million euros ($430 million), pass the cuts through a restive parliament and guarantee in writing that they will be implemented even after planned elections in April.

News that the leader of a small partner in Greece's coalition government would now vote against the austerity measures deepened the gloom on Friday.

If the new demands are in fact fulfilled, the eurozone will give Greece the green light to start implementing a separate bond swap deal with banks and other private investors designed to slice some 100 billion euro ($132 billion) off Greece's debt load.

"For all the rhetoric it is probable that a deal will still be reached because the consequences of not doing so would be so damaging for the EU as a whole," said Gary Jenkins, managing director at Swordfish Research.

However, it is possible that the Greek politicians "suffer from negotiating fatigue and decide that putting their people through the austerity measures are not worth it," he added.

Meanwhile, police fired teargas at black-masked protesters who threw petrol bombs, stones and bottles in central Athens at the start of a 48-hour general strike against planned pay and job cuts. But street protests were relatively small and mostly peaceful.

The biggest police trade union said it would issue arrest warrants for Greece's international lenders for subverting democracy, and refused to "fight against our brothers." A daily newspaper depicted German Chancellor Angela Merkel in a Nazi uniform with a swastika armband.