Smoke and Mirrors: Greece's Day of Reckoning

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Photograph by Angelos Tzortzinis

Raging against the storm A man in Athens reacts after an attack by riot police in Syntagma Square, the site of mass protests in response to budget cuts

Scraping together $40 billion in spending cuts in a country already shaved to the bone is a tall order. But try doing it with the lights off while dodging rocks, gas bombs and tear gas and with impatient foreign officials breathing down your neck.

Welcome to the Greek debt crisis 2.0. On June 21, Greek Prime Minister George Papandreou narrowly skirted political death in a vote of confidence in the Greek Parliament, after weeks of political infighting and escalating protests against a new round of austerity measures demanded by the European Union and the International Monetary Fund. Won by a paper-thin margin of 10 votes (and two abstentions), the victory came just as parts of Athens were being hit by rolling blackouts caused by worker strikes at Greece's main power utility and as thousands of protesters were swarming Parliament and shining hundreds of green lasers into the eyes of riot police in Syntagma Square. Days earlier, rioters had hurled gasoline bombs at the country's Finance Ministry. All in time for Europe's finance ministers to breeze in for a surprise visit to Athens to see how things were going.

Just hours before the vote, newly appointed Greek Finance Minister Evangelos Venizelos called on Parliament to "convince our partners that we are serious and credible as a government, as a Parliament and as a country." That will take some more doing. Greece still needs to pass more budget cuts, scheduled for a vote next week, to secure a much needed $24 billion tranche of aid from the E.U. and IMF's last bailout to cover its expenses through summer. Greece's opposition leader Antonis Samaras has been putting up a fuss, making those cuts even more difficult to pass. If they do, there's no telling how long the Greek people will tolerate them or how many more bailouts will be needed to stave off another default down the road. Whether Greece's troubles end in a bang or a whimper, the impact is likely to extend far beyond the country and its dour creditors. There are vast implications for the direction of Europe, the future of the euro and the strength of global economic recovery.

The euro-zone crisis is not just about how the European project went wrong or why Germany, Greece's biggest creditor, won't play nice. There's a sinking feeling while watching events unfold in Greece that the West is as faded as an old prom queen. Greece isn't the only economy facing the fire. Crushing debt and stubbornly high unemployment — once troubles reserved for poor countries — are plaguing Italy, Ireland, Portugal, Spain and even Britain and the U.S. "The world is truly upside down," says Mohamed El-Erian, economist and CEO of bond-fund manager PIMCO. "At one point Portugal was looking to Brazil, its former colony, for help with its debt. Europe used to be the elite of elite economies. Now it has nothing but bad choices on offer."

Nowhere is that truer than in Greece. Faced with the prospect of a shattering default on Greece's debts, its European backers are forcing budget cuts so severe that public support for the government has nowhere to go but down. An opinion poll published by Greece's Kathimerini daily, days before the vote, handed Papandreou his worst ratings yet. And some members of his ruling PASOK party suggested their yes vote was to express support for more bailout money, not for the government. "This government is almost dead," says Kostas Ifantis, a political-science professor at the University of Athens. "I cannot see how they can push forward with the very, very painful measures the country needs. It was hard 10 months ago, but it's even harder now." Papandreou's latest attempt to placate dissent by plumping his Cabinet with party insiders and oppositionists may offer a bit of momentum. But with both the ruling Socialist Party and the main opposition party, New Democracy, shedding supporters by the day, the threat of a power vacuum and bigger upheavals looms. "In half a year, when the Greeks haven't fulfilled their promise to creditors, we'll have another crisis, and eventually there will be severe revolts," says Daniel Gros, director of the Centre for European Policy Studies in Brussels.

Skirmishes among European leaders over what to do about Greece's cash-flow problem — which has left it once again on the brink of default — are rattling markets; the S&P 500 dropped 5% in the run-up to the Greek vote, and borrowing rates in other vulnerable countries like Spain are soaring. The latest fight is over who should pay the $110 billion shortfall from Greece's most recent bailout to tide it over for several more years. Under fire from irate German taxpayers, Germany's leaders, who favor shifting the burden of bailouts onto Greece and its bondholders, appear to have softened their stance. German Chancellor Angela Merkel has agreed not to force Greece's next bailout onto private lenders. Instead, any contributions to the Greek rescue by banks and pension funds will be "voluntary," a concept European officials have yet to fully explain. But the difference could add up to mere semantics. If Greece's private lenders do decide to "voluntarily" extend the terms of their loans (in other words, a virtual restructuring, which would involve negotiating longer-term payments for Greece at lower interest rates), credit-rating agencies, the ultimate arbiters of Greece's solvency, could still decide to downgrade Greece's rating, which would put the country in default. The result, according to a chorus of financiers, including the European Central Bank and Jamie Dimon, head of JPMorgan Chase, could be a run on banks holding Greek debt. Enter global financial crisis part two.

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