Stalling reforms, EU gridlock are deja vu for Greece

ATHENS, May 22, 2011 (AFP) - An economy in deep trouble, European pressure for quicker reforms and domestic politicians at each others' throats: it's deja vu for Greece which needs a new lifeline after nearly hitting the rocks last year.

And yet, the situation could actually be worse this time round.

The International Monetary Fund, so crucial in whipping up a rescue package for Greece last year, is now headless after the resignation of its chief Dominique Strauss-Kahn who faces an embarrassing sex assault trial in New York.

And for the first time, divergence of opinion between Europe's financial brass on how to act on Greece has exploded into open dispute.

The eurozone and the European Central Bank, guardian of fiscal stability in the bloc's monetary union, publicly sparred this week about whether Greece should be allowed easier repayment terms on its enormous sovereign debt.

After years of runaway deficits, the Greek debt has exploded to 340 billion euros ($485 billion) and economists now doubt that Athens will be able to stay abreast of its obligations when an EU-IMF rescue loan runs out in 2013.

Eurogroup head Jean-Claude Juncker this week said a restructuring of Greek debt could be possible provided that Athens first commits to further reforms and a massive privatisation programme that has so far failed to launch.

But the ECB retorted that it could stop accepting Greek bonds as collateral for loans if Athens restructures its debt and forces losses on investors.

"A sovereign debt restructuring would undermine the eligibility of Greek government bonds," the ECB's chief economist Juergen Stark said in Athens.

"A continuation of liquidity provisions would be impossible," he said.

Greek banks are currently permitted to exceptionally borrow ECB funds by putting up Greek government bonds as collateral.

Those sovereign bonds have been downgraded to junk status and would not normally qualify, meaning that the Greek banking system would face collapse.

The Socialist government of George Papandreou has struggled to adhere to austerity reforms monitored by its 'troika' of last-resort creditors -- the EU, IMF and ECB, which gave Athens a 110-billion-loan in 2010.

Sweeping spending cuts and tax hikes last year caused widespread protests and failed to bring the deficit to below 10 percent of output as calculated.

Revenue and deficit targets are slipping again this year and the government seems unlikely to reach its target 7.4-percent budget shortfall.

Papandreou has now pinned his hopes to a new three-year economic programme of further cuts and state asset privatisation designed to bring in some 50 billion euros by 2015.

"The battle is in full swing," the PM said Friday.

"Neither I nor anyone in this government is going to back down," he said.

"We will do whatever it takes to get Greece back on its feet."

And he pledged that Athens "will return" the loans it has taken.

Greece's eurozone peers, who face scepticism at home over another bailout for Athens rumoured to be worth some 60 billion euros, are pressing the Greeks to raise money from selling some of its family silver first.

They have also called on the country's bickering political parties to unite behind the effort to save the country from financial deadlock.

But Papandreou's opponents in parliament have so far treated his calls for consensus with reactions ranging from indifference to outright scorn.

"He has gone beyond (British PM Margaret) Thatcher and (Chilean dictator Augusto) Pinochet," leftist leader Alexis Tsipras said of Papandreou.

"He is unscrupulous in order to cling onto power... weak and scared," said Tsipras, the young head of the Left Coalition party that has regularly boycotted talks with the government on the reforms.

More importantly, the main opposition conservative New Democracy party -- in power from 2004 to 2009 and blamed by many for Greece's current predicament -- rejects the austerity recipe dictated by the EU and IMF.

"Three-quarters of the Greek people's sacrifices have gone to waste," ND leader Antonis Samaras said this week.

"We had the wrong recipe. It was faulty planning from the start. And the government is at fault for accepting it without negotiation."

The conservatives agree with the principle of privatisation but insist it is wrong to sell assets in a crisis.

"Another plan is needed," said Samaras, an economist and former minister.

New Democracy, which is catching up with the ruling Pasok party in the polls, has proposed an alternative plan to cut 18.3 billion euros in public spending over four years and raise another eight billion from lower tax rates.

"The numbers don't add up. Society is boiling," Samaras said.

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