Why should German taxpayers help banks make profit on a bankrupt country?

Total collapse a real fear as Greece teeters on the brink

Karen Kissane, The Age, June 17, 2011
GREECE is on a knife-edge as it waits to see if Prime Minister George Papandreou can save his battered government—and the nation’s economy—from collapse.

As world financial markets panicked over the prospect that continued violent protests could lead to the nation defaulting on its debt, Mr Papandreou moved yesterday to reshuffle his cabinet and seek a confidence motion in Parliament. At one point on Wednesday, Mr Papandreou had offered to quit if that would bring opposition leaders into a government of national unity.

In a televised address, however, he stood fast. “Tomorrow [Thursday] I will form a new government and then I will ask for a vote of confidence. I will continue on the same course. This is the road of duty.”

The moves came after the fiercest day of protest Athens has seen in a year.

Demonstrators hurled fire-bombs, stones and wood at police outside Parliament. Some tore marble slabs out of historic Syntagma Square. Police responded with tear-gas and batons. Crowds chanted “Thieves!” and “Resign! Resign!”

Mr Papandreou failed to win support to pass new austerity measures this month, including tax rises, asset sales and spending cuts totalling €28 billion ($A37.6 billion).

Austerity was demanded by the European Union and the International Monetary Fund if Greece was to get more money from a €110 billion bailout fund. They fear Greece will default on its debt and spark a credit crisis that would also suck in Europe’s other leaky boats—Spain, Ireland and Portugal.

The original bailout has failed. Despite tough cuts over the past year, unemployment has risen and youth unemployment is at 42 per cent.

Greece owes €300 billion, roughly 1½ times the country’s annual output. Interest on its bonds—the money Greece must pay to investors who lend it money—yesterday soared close to 28 per cent, suggesting investors believed the country was near bankruptcy. It seems unlikely that Mr Papandreou can both hold the line on reforms and win over the opposition, or even his own socialist Pasok party.

Two of his MPs reportedly refused to vote for the package and others were uncertain. The opposition said it would join a unity government only if the terms of the European Union bailout were renegotiated.

A second international bailout is being mooted, but Germany disagrees with the European Central Bank over the form it should take.

Berlin argues that private creditors must accept some losses, or else taxpayers would be paying the price while banks pocket the benefits.

But the ECB and several other countries believe markets would take fright, sparking a run on Greek banks and a deeper crisis.