A standoff between Greece and its euro-zone partners over the timing and terms of a potential rescue is nearing a crucial juncture as the cash-strapped country faces a key test of investor willingness to keep funding its ballooning deficit. Greece faces several important challenges in the coming days, including an expected bond auction, a planned general strike on Wednesday, and a visit from European Union officials that began Monday, aimed at pushing the country to take tougher steps to rein in its budget deficit.
Euro-zone leaders have so far offered only a deliberately vague promise of "determined and coordinated action, if needed" to help Greece, and only under the condition that Greece imposes more painful fiscal measures than it has so far agreed to, including a sales-tax increase and deep cuts to public-sector pay. The haggling over possible European aid for Greece has become a game of chicken between Athens and the core economies of the euro zone, led by Germany and France. Germany and France are deeply reluctant to pay for Greece's free-spending ways and want to keep up the pressure on Athens to enact far-reaching overhauls of taxes and public spending.
The Greek government wants its euro-zone peers to say more explicitly that they will bail out Greece if needed, and how. That would give financial markets more confidence that Greece won't default on its debts, bringing down the yields on Greek bonds and helping the government to raise funds on the market without paying punitive interest rates, Greek officials argue. The question is who will give in first. Many analysts say Germany and France, despite their tough talk, will ultimately have to help Greece to avoid wider damage to the euro zone.
"The Greeks have the stronger hand, because they can say: 'Do you really want to make us bankrupt?" says Daniel Gros, director of the Centre for European Policy Studies, a Brussels think tank. A Greek default would create too great a risk of financial-market panic spreading to other struggling economies including Portugal, Spain and Italy, threatening major German and French export markets as well as the financial health of many euro-zone banks exposed to Southern European debts.
In addition, Greece still has the option of asking the International Monetary Fund for aid, bypassing other euro-zone governments. "As an IMF member Greece is entitled to do so," says Jakob von Weizsäcker, a fellow at Brussels think tank Bruegel. "The euro zone can't tell Greece: 'Comply with our demands, or you're in trouble,' " Mr. von Weizsäcker says. Euro-zone officials want to show they can handle Greece internally, limiting IMF involvement to technical advice only. But the IMF, which offered Hungary and Latvia relatively generous bailouts during the financial crisis, has said it would offer Greece aid if asked. Greek officials have said they haven't asked anyone for money.
Still, Greece is anxious to extract a clearer pledge of support from the euro zone quickly. Prime Minister George Papandreou has complained that Greece is having to pay too-high interest rates to borrow due to markets' lack of confidence, making the task of cutting its deficit harder. Greek officials expressed willingness on Monday to discuss Europe's demands for extra fiscal steps, and said Athens might agree to extra measures before the March 16 meeting of EU finance ministers, which will review Greece's progress.
Greek officials say they are considering raising between €3 billion ($4.1 billion) and €5 billion possibly through a bond issue perhaps as early as this week. The bond issue hasn't been confirmed. The interest rate that Greece has to offer to attract investors will be closely watched as an indication of whether Greece can meet its funding needs in the next few months without a bailout from other euro-zone countries. A team of EU and IMF officials arrived in Athens on Monday to discuss extra tax increases and spending cuts on top of Greece's existing measures to rein in a budget deficit that has raised financial-market fears of a possible debt default.
Meanwhile, Greece's main labor unions are planning a one-day general strike on Wednesday to protest the government's measures announced so far, which include cutting public-sector pay and perks. Luxembourg's Prime Minister Jean-Claude Juncker, who runs meetings of euro-zone finance ministers, said last week that Greece should haul in more revenue by raising sales taxes, imposing excise taxes on luxury goods including cars, and increasing levies on fuel. All of these measures would come from the pockets of Greek consumers.
European officials say they also want Greece to cut public-sector pay by more than Athens has pledged to so far, and stress that Greek action to implement these measures—rather than merely announce them—is a precondition of any euro-zone aid. German and French policy makers view aid to Greece as hard to justify to their domestic voters, at a time when money is tight at home and the pain of the past year's recession is still being felt. Brussels is also trying to make Greece report details of a controversial 2001 currency swap transaction with Goldman Sachs Group Inc. that shrank Greece's reported debt number.
The EU had set a deadline of Friday for a response, but as of Monday afternoon in Europe, it was unmet. An EU spokesman said the Greeks had sent some documents Friday, but they related to a separate Greek accounting problem and not the swap. A Greek government official in Brussels said that the finance ministry, which is in charge of gathering the information, was hampered by strikes among its own personnel last week. Greece has asked for more time.