The EU and IMF — but not Germany and France — have agreed on a €110bn bailout for Greece and the Papaconstantinou government has admitted to "mistakes" and announced its "absolute determination to tackle this and, secondly, to get out of the recession earlier."  But while the parliament is debating the austerity measures, analysts are saying the mandated reforms fall far short of what’s needed to prevent default.  Meanwhile, thousands of Greek citizens are rioting in the streets, protesting that they’ve gone too far.

Kerin Hope and Ralph Atkins for FT:

“We made mistakes,” Mr Papaconstantinou admitted. But he insisted the new front-loaded package showed “one, our absolute determination to tackle this and, secondly, to get out of the recession earlier”.

Both right- and leftwing Greeks put most of the blame for the soaring deficit and public debt on the previous conservative government, which hired about 100,000 additional civil servants and boosted public spending by more than €20bn during five years in office.

But Greek society is also assessing the need for drastic changes in the political system, Mr Papaconstantinou said.

“People are looking intensely at what went wrong, how we got to this point. It’s overwhelmingly a problem of the [conservative] opposition, but we’re not innocent – we also governed for a very long time,” he said, referring to the socialist administrations of the 1980s and 1990s which filled the ranks of the public sector with their own supporters.

The new measures will plunge Greece deeper into recession, with the economy set to contract by about 4 per cent this year and another 2.6 per cent next year before growth turns positive in 2012.

Reforms of the tax and pension systems, with the opening up of labour markets are intended to reduce the role of the bloated public sector and free up resources for growth, Mr Papaconstantinou said.

“The public sector is dragging down the economy and not allowing it to flourish,” he said.

But further cuts in public sector wages and pensions, due to take effect this month, along with another increase in value-added tax – the second this year – have already triggered a fierce backlash.

Indeed, it has.  BBC:

Greek public sector workers have stormed the Acropolis and scuffled with riot police after launching a 48-hour strike against austerity measures.


Union leaders say the cuts target low-income Greeks.

"There are other things the [government] can do, before taking money from a pensioner who earns 500 euros (£430) a month," Spyros Papaspyros, leader of the public servants’ union ADEDY, told Greek private television.

Dozens of Communist protesters broke into the ancient Acropolis at dawn, draping giant banners on the Parthenon temple reading: "Peoples of Europe Rise Up." "We want to send a message to the farthest reaches of Greece and Europe," Communist MP Nikos Papaconstantinou said. "Similar measures that eliminate social security are taken across Europe. But popular anger will rattle imperialist organisations."


The demonstration was largely peaceful. Some protesters handed red roses to riot policemen. But some scuffles broke out near the parliament building, with demonstrators throwing stones at riot police, who responded with pepper spray.

But the protests have just started. And the thing they’re protesting hasn’t yet happened.

Meanwhile, David Oakley and Ralph Atkins report for FT, investor confidence that all this will at least contain the damage is lower than ever.

Investors said contagion could hit weaker euro zone economies, such as Portugal and Spain, with some warning they may also need to be salvaged.

The fresh fears sparked a 0.9 per cent fall in the euro against the US dollar and saw Greek stocks end the day lower, although bond markets across Europe were stable with yields on two-year Greek debt dropping below 10 percent for the first time in more than a week.

Speculators are increasingly betting that the euro zone crisis could escalate as short positions against the euro rose to a fresh record.  This is a sure sign the 16-country bloc could come under further selling pressure in coming weeks, investors say.

Mohamed El-Erian, chief executive of Pimco, the world’s second biggest bond fund, said there were still doubts about the Greek rescue package. "The announcements will not mark the end of the Greek debt crisis; nor will they constitute a much-needed turning point that can be sustained for many months," he said in an comment article.

Ulrich Leuchtmann, at Commerzbank, added: "French and German governments still have to agree the package, so uncertainty persists, while market concerns regarding the likes of Portugal and Spain remain unaddressed."

Felix Salmon of Reuters cites Paul Krugman‘s reaction to the plan:  "[A]nyone demanding that countries not run such big deficits is, in effect, calling for higher taxes and slashed spending in the face of a deep recession — Hoovernomics. Is that really what they want? Is that their final answer?"

Salmon answers the rhetorical question:

The fact is that the bailout package really doesn’t address the problem, which is one of solvency rather than liquidity. The European loans are being extended at about 5%, which while much lower than market rates is still not low enough to make anything approaching a dent in Greece’s debt dynamics. And by the time the bailout package is exhausted, if Greece even gets that far, its debt-to-GDP ratio will be significantly higher than it is right now, thanks to both a rising numerator and a declining denominator.

So the prospects of an imminent default seem to have eased: Greece will almost certainly have the money to roll over the debts coming due in a couple of weeks. But this is not a solution to the Greek problem, even if Greece successfully implements all the austerity that it’s promising. Which it won’t.

There’s also widespread bitterness that the Eurozone flouted its own rules in the bailout.   Spiegel:

[A] separate aspect of the agreement has proven just as difficult for many to swallow. The European Central Bank (ECB) elected to suspend its minimum credit rating requirement in order to issue debt to the Greek government. The ECB will accept Greek bonds as collatoral despite the fact that ratings agencies lowered Greece’s rating to junk status last week.

The move was seen as necessary to avoid a Greek bankruptcy and to prop up the European common currency, the euro.

"This is basically telling us that no euro-zone country will have its sovereign debt excluded from ECB refinancing operations," Fortis Bank economist Nick Kounis told Reuters. "Europe is coming together, and they see the threat of a kind of European Lehman event if there was to be a Greek default."

But, aside from the fact that the loans haven’t fully been approved, the Greeks haven’t yet accepted the terms, the unlikelihood of success, the flouting of rules, and the righting, all’s going swimmingly.

James Joyner is managing editor of the Atlantic Council. Photo credit: Getty Images.