This is what it looks like when bond markets run the world

03/03/2010 5:17 pm EST


Jim Jubak

Founder and Editor,

This is what it’s like when a country loses control of its own affairs and has to dance to the tune of the bond market.

Today, March 3, Greek Prime Minister George Papandreou announced another $6.6 billion in budget cuts. The new round of reductions is meant, first, to convince skeptical European Union leaders that Greece is serious about reducing a budget deficit that had climbed to 12.7% of GDP (gross domestic product.)  Leaders such as Germany’s Angela Merkel, scheduled to meet with Papandreou on March 5, have refused to offer Greece any concrete aid or guarantees without further action.

But the real audience here is the bond market. Greece has to roll over about $25 billion in bonds in April and May. The bond market could force Greece to pay a ruinous interest rate to refinance that debt or, worse yet, simply refuse to bid at all. The latter would bring the country one step closer to default.

But Greece—or more accurately the average Greek citizen—is going to pay a hefty price to convince the bond market to pony up.

The package sent to the Greek parliament today, and which includes measures to implement both the first and second round of budget measures would:

  • Raise the country’s main value-added tax to 21% from the current 19%.

  • Increase taxes on fuel, alcohol, and tobacco for the second time this year.

  • Reduce spending on education by 5%.

  • Freeze pensions for state employees

  • Cut the special payouts that Greek workers now receive for Christmas (a month of wages), Easter (one-half of a month) and summer (one-half of a month) by 30%.

  • Reduce benefit payments public workers get for seniority or an advanced degree by 12%.

Parliament is expected to vote on the package on March 5. That would meet the March 16 deadline for a review of the country’s deficit reduction plan by the European Union.

As you might imagine, the package isn’t exactly popular with Greek public or private sector workers who feel that they’re being made the scapegoats for a corruption-ridden system that funneled wealth to the politically connected during the boom years. Add in a big measure of resentment toward Germany. Cheap money, the argument goes, enabled Greek consumers to buy German exports—that it turned out they couldn’t afford—and now a Germany that prospered from that export boom is demanding payment in full from a struggling Greek economy.

The major public workers union is planning a protest tomorrow March 4, and has announced a 24-hour general strike (the third of the year) for March 16.

They might have even more to protest by that date. It’s not clear to me that even these cuts will be enough to make the bond market happy. The IMF (International Monetary Fund), for example, has responded to the Greek austerity program with an attitude I’d sum up as “Good start. What else ya got?”

The bond market will tell Greece how it really feels in the next few days. The country is looking to float an offering of about $6.5 billion to $7 billion in the next few days. It’s hoping for an interest rate between 5.5% and 6%. If bond investors demand something close to 7%, you’ll know they’re sending Greece back to the woodshed. And Greeks should prepare for more pain.

Makes me really want to live in a country where the bond markets run the show.

(Unless, that is, I already do.)
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