CIAO DATE: 03/2010
February 2010
Greece has slid into a serious fiscal crisis over the last few months. A ballooning budget deficit and high levels of government debt have raised questions in the minds of investors about the sustainability of the country’s public finances. The spread between Greek bond yields and those in Germany has risen to the highest level in more than a decade. As well as fiscal problems, Greece also suffers from weak external competitiveness, and now faces a series of policy choices all of which look unpalatable. Attempting to 'tough it out' with a sharp fiscal adjustment and deflation of wages could deepen the recession still further and founder in the face of social tensions. The 'nuclear option' of default and devaluation could tackle external adjustment but would cause immense financial disruption and negative contagion effects on the Eurozone and the rest of the world. Against this background, pressure for a bailout has been rising but so far the other EU countries have stopped short of announcing explicit financial support for Greece. The key risk period could April-May, when a large volume of Greek debt matures.
Resource link: Is Greece heading for default? [PDF] - 201K