- The Washington Times - Wednesday, June 15, 2011

Global markets hit a pocket of turbulence Wednesday as a year-old European bailout for Greece appeared to be unraveling, with deep and unpopular budget cuts triggering protests in Athens and threatening to topple the Greek government in a chain of events that investors fear will end in a globally destabilizing default on the nation’s debt obligations.

The Dow Jones industrial average was down more than 200 points at times in trading during a topsy-turvy day of Wall Street teetering in response to Europe’s woes.

The euro and European markets plummeted after leaders of the European Union and International Monetary Fund in intensive meetings with Greek leaders came no closer to agreement on further aid and a recovery plan for the struggling Mediterranean nation.

Thousands of protesters surrounded the parliament building, and riots broke out in Athens in response to a new round of austerity measures sought by the EU and IMF. George Papandreou, Greece’s socialist prime minister, at one point offered his resignation in a bid to quell growing opposition to the harsh measures, and said he would try to form a new government Sunday.

The Dow, having recovered some earlier this week from a rough spell induced in part by Greece’s woes, capitulated Wednesday and ended the tumultuous day down 179 points at 11,897.

Major stock indexes from Frankfurt to New York lost from 1.25 percent to 1.75 percent of their value.

With European markets plunging anew into turmoil, investors seeking safe havens sent the U.S. dollar and Treasury bonds soaring, despite the economic and debt woes also plaguing the United States.

“The Greece situation continues to deteriorate,” said stock market commentator Ned Brines, noting that global markets are reverberating as they did a year ago when Greece’s financial straits led to months of market turmoil and the first IMF bailout of a Western European country. “History may not repeat, but it certainly rhymes.”

Adding to Wednesday’s market turbulence, Moody’s Investor Service warned that it might downgrade three major French banks with large holdings of Greek debt.

The cloud over BNP Paribas, Credit Agricole and Societe Generale sent financial stocks plummeting in London, Frankfurt and New York as well as Paris.

Deep divisions have emerged in Europe over whether to sanction a default or restructuring of Athens’ debt as the price of additional aid.

Germany — the European nation shouldering the largest share of the bailout burden — argues that banks and other bondholders should be forced to sacrifice just like taxpayers.

But the powerful European Central Bank, which as part of the bailout is backing much of Greece’s debt, has stridently opposed any involuntary “haircut” imposed on investors.

The standoff has led to fear and uncertainty in financial markets that Greece will be forced into an uncontrolled and potentially devastating default as it is unable to roll over its massive debts at interest rates hovering around 20 percent.

“If a compromise cannot be reached, there is a chance that the second rescue effort disintegrates, leaving Greece at the mercy of the bond markets,” said Karl Schamotta, market strategist at Western Union Business Solutions. “One suspects that policymakers will avoid such a dire outcome, but the uncertainty is weighing” on markets.

Alex Jurshevski, an analyst at Recovery Partners, said the situation in Europe is increasingly dangerous because European leaders for months avoided developing a “Plan B” should their original bailout plan fail, and now as market pressures are building they are at loggerheads over what to do.

“In combination with the inability of the Greek government to rally domestic political support around a common negotiating platform, this implies that there is a growing risk of an uncontrolled default resulting from this very serious situation,” he said.

Kenneth Rogoff, Harvard professor and former chief economist at the IMF, said the international financial firefighter, which teamed up with the EU in the past year to organize three separate bailouts of European nations, bears equal responsibility for the paralysis.

The IMF must persuade European officials to accept what now appears to be an inevitable debt restructuring, he said.

In previous IMF rescue efforts in Asia and Latin America, Mr. Rogoff said no other nation has been forced to go through the painful budget cuts and recession that has been imposed on Greece without also getting some relief from their overwhelming debts.

“Why should the Greek people, not to mention the Irish and the Portuguese, accept years of austerity and slow growth for the sake of propping up the French and German banking systems?” he asked.

“We have reached exactly the moment when the IMF needs to help the eurozone make the tough decisions that it cannot make on its own.”

The issues confronting Greece go well beyond that small nation to other larger debt-strapped nations that are struggling in Europe, he said.

“The fund needs to create programs for Portugal, Ireland and Greece that restore competitiveness and trim debt, and that offer them realistic hope of a return to economic growth,” he said.

“The IMF needs to prevent Europeans from allowing their constitutional paralysis to turn the eurozone’s debt snowball into a global avalanche.”

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