WASHINGTON, Feb. 22 (UPI) -- This week is likely to decide whether the Greek debt problem is contained or whether it starts to spill over to topple other European dominoes, such as Portugal and Spain, and trigger a much wider currency crisis.
The Greek government, with a gross domestic product of just more than $300 billion, has to repay some $70 billion in debt this year and more than $20 billion is due within the next 10 weeks.
To pay those debts, it has to sell new government bonds, and it hopes to sell $5 billion in 10-year bonds this week. The first question is whether it can sell them at all and the second is how much interest will Greece have to pay.
The first question should not have to be asked. Greece is a sovereign country with a massive shipping and tanker industry and a huge tourist trade. Its partners in the European Union and in the euro currency zone have made vague if sonorous pledges of support. It ought to be able to sell its debt.
But this week will also see a general strike, called by the labor unions, against the austerity measures the Greek government has imposed. They include wage freezes, pay cuts for public employees, higher retirement ages and cuts in social security and the military budget. Spasmodic strike action has hit the Finance Ministry, among the very civil servants meant to administer these cuts.
Opinion polls suggest that the government of George Papandreou still has majority support in the country. So long the government keeps its nerve and the police and military remain loyal and maintain order, the government should be able to ride out the general strike.
But the international markets -- which include hedge funds and short-sellers as well as investors -- will be watching the strikes carefully as they decide whether to buy Greece's new bonds. And they have two good reasons for caution.
The first is that the EU's promises of support for Greece have been so imprecise. The German government Friday formally denied a report in the weekly Der Spiegel that a $30 billion support fund was being mobilized among EU partners to buy Greek bonds.
"The (German) Finance Ministry has taken no decisions in this regard," ministry spokesman Martin Kreienbaum said in an e-mailed statement.
The second reason for concern is that Greece's last bond auction, in January, seemed to succeed in selling more than $10 billion in 5-year bonds. But the bonds nosedived in the secondary market. The bonds' interest rate was initially priced at 3.82 percent higher than equivalent German bonds; but in the secondary markets, the rate rose to 4.62 percent above German bonds.
In short, these who bought the last Greek bond issue lost money fast. They will not be eager to be burned a second time. Even without this week's inevitable TV images of strikes and demonstrations in Athens, investors would be looking for interest rates of at least 7 percent and probably more.
Of course, this could be easily resolved if Greece's EU partners were prepared to buy or guarantee the current bond issue, or if the EU were to set up its own internal version of the International Monetary Fund to help bail out member states in trouble. But the politics of this seem close to insuperable, with the key state, Germany, facing massive domestic opposition to a Greek bailout.
Germany's top policymakers also worry that helping Greece could set a precedent that would leave them with open-ended commitments to other EU states such as Portugal, Spain and Italy. When Germany joined the euro, it insisted on legal rules to prevent any one state from being responsible for the sovereign debts of other euro members.
There is a loophole, allowing special aid for a member state "in extraordinary circumstances." And the (still remote) prospect of a Greek default setting off a chain of dominoes and a systemic crisis for the euro could yet force the EU and eurozone members to use it.
But for the moment, the German view is firm; Greece must be seen to pay a stiff price for its years of profligacy. Under Greece's latest austerity plan, the country is going to lose 10 percent of GDP over the next three years, a price steep enough to jeopardize the current government and probably lead to a crisis election and the formation of a government of national unity with a mandate to impose the level of suffering the bond markets (and Germans) require.
Anything less, in the German view, would open the floodgates of moral hazard and encourage other highly indebted member states to spend and borrow, knowing that a rescue would eventually come. And how, exactly, does a German finance minister explain to a highly taxed and still-working 67 year-old in Munich why his hard earned money should go to subsidize a Greek civil servant who retires at the age of 58?
