Greek riots remind outside investors about risks

By Jeremy Gaunt, European Investment Correspondent - Analysis

LONDON (Reuters) - Clouds of tear gas, flying stones and burned out cars in Greek cities are stark reminders to outside investors of the sclerosis of Greek reform efforts and may even deter new businesses from starting up there.

Greece has long been known for the speed with which demonstrations and strikes can paralyze the country, be it simple protests against pension reform or unruly rioting from self-styled anarchists.

But the latest outpouring of unrest has been at a new level. Initially triggered by the police shooting of a 15-year old boy, it has quickly morphed into general dissatisfaction over everything from taxes to prices and government support for the banking industry.

To some outsiders it looks for all the world like Paris in 1968. The risk for Greece, as a peripheral European Union investment target in the first place, is that investors will vote with their feet.

"The riots are clearly a difficult challenge for the government, particularly given the Greek tradition of what some people say is ungovernability," said Chris Pryce, director of sovereign ratings for Greece at Fitch Ratings.

There is already some evidence that the rioting has been putting off investors.

The spread between 10-year Greek bonds and benchmark 10-year Bunds -- a measure of investment risk -- was at its widest in a decade on Thursday. The spread hit 190 basis points, up from 168 before the rioting began.

It means that investors are demanding more return for the risk of holding the government bonds, even if groups like Fitch still rate the chances of a bond default as highly unlikely.

SLOWLY, SLOWLY

While factors such as fury over the shooting and a complicated relationship with the police dating back to the military junta in the 1960s and early 1970s clearly are in play, the riots are having a wider impact.

Most obviously, they are underlining the difficulty that consecutive Greek governments have had in modernizing an economy facing problems even before the euro zone headed into recession.

Almost any attempt at reform is met with loud protest and the current troubles can be seen as an example of this writ large.

"It's a reminder of the real problems that face the economy, this element of underperformance and stretched finances which has been persistent for some time now," said Sarah Hewin, senior economist at Standard Chartered.

"Tackling the problems relies on fundamental changes. There is a lack of competitiveness (and) broader structural reforms that need to be implemented," she said.

Most glaring are a current account deficit calculated by the Bank of Greece to be at 14 percent of GDP and a pension system many believe will collapse in a few years.