Factbox: Key political risks to watch in Greece

ATHENS (Reuters) - Greece is under huge pressure from markets and the European Union to deliver on pledges to slash a spiraling budget deficit that has shaken the euro zone.

Even though it passed a draconian austerity package and received assurances that its EU partners and the IMF would not let it go bankrupt, Greece continues to be hammered by investors demanding twice the interest rate Germany offers.

Polls suggest that a majority of citizens back the austerity plan, but discontent is rising among the groups most affected, notably civil servants, and the ruling socialists’ own ranks.

Worries in financial markets that Greece may not be able to service its heavy debt have raised questions over a possible spill-over to other euro zone members.

Following are key factors investors are watching:


Greece stunned markets in October last year when it revealed that its budget deficit for 2009 would be 12.7 percent of GDP -- over twice as big as the previous estimate and more than four times the 3 percent ceiling imposed by the EU. Debt is forecast at 120.4 percent of GDP this year, the highest in the euro zone.

The government announced on March 3 a 4.8 billion-euro ($6.47 billion) package including across-the-board cuts in the public wage bill, after initial pledges to cut the deficit to 8.7 percent of GDP this year failed to convince.

Markets showed some relief at the deficit-cutting plan and tentative EU support, pushing Greek bond yields and CDS rates lower -- yields on Greek bonds fell below 6 percent for the first time since mid-February. But the yields rose again to 6.5 percent after Germany signaled it was against an immediate EU support package for Greece and the announcement of a joint EU-IMF bailout fund was short on details.


-- Signs of increasing opposition from unions, public opinion and within the ruling PASOK party (see below).

-- Implementation of the plan. EU policymakers and rating agencies welcomed the measures. S&P stopped a review to downgrade Greece’s ratings. But Moody’s warned that Greece needed to implement its deficit cut plan perfectly to avoid the prospect of a rating cut. Fitch also has the country on negative outlook. Any new downgrade would pressure Greek bonds and the euro.

The EU Commission has put Greece under close monitoring. Athens reported on its fiscal progress to Brussels on March 16 and must submit quarterly reports from mid-May. The reports will show Greece’s progress on its deficit targets and more detailed plans for the coming years. Analysts see this unprecedented short leash as necessary because of accumulated mistrust in Greek statistics.

Much of the 4.8 billion-euro austerity plan, including fuel tax hikes, public servants’ bonuses cuts and a pension freeze has already been enacted. The government plans a pension bill in April to increase the effective average retirement age to 63 from 61.

-- Macro economic risks. Greece is going through its first recession in 16 years. The country’s central bank said on March 22 it expected the economy to contract by 2 percent in 2010, repeating the previous year’s dismal performance. Unemployment is growing, tourism is not expected to do well and credit is tightening. All of this could affect Greece’s capacity to meet its targets this year, by affecting GDP and in turn government revenues.


Opposition to the government cutbacks is on the rise with almost daily protests and regular strikes. Police clashed with dozens of stone-throwing youths in Athens in front of parliament during a protest rally on March 18 but protests are much more low-key than the riots that rocked Athens in December 2008.

Opinion polls show a majority of the public opposes strikes and accepts the austerity measures as necessary. However, most citizens find the measures unfair because they do not sufficiently target tax dodgers and the rich.

Prime Minister George Papandreou’s cost-cutting plan also faces opposition within his party. Labor unions representing half the country’s 5 million-strong workforce staged their third 24-hour strike in a month on March 11 and more walkouts may follow.

This comes against a backdrop of discontent among leftist and youth groups who just over a year ago triggered Greece’s worst riots in decades.


-- Signs that opposition to the measures is increasing further as tax hikes and cuts kick in. The VAT (sales tax) increase started on March 15 and tax hikes in fuel and tobacco are also in force. Civil servants saw their Easter bonus, which used to be worth half their salary, cut by 30 percent.

-- Renewed unrest would unsettle bond and CDS markets, particularly if they feared reforms would be watered down as a result.

-- Increasing internal splits, most likely around the currently marginalized socialist old guard, might imperil Papandreou’s government and would also worry investors.

-- Small-scale bombings and other similar violence could further sour investor sentiment. A bomb explosion in Athens on March 28 killed a 15-year old Afghani boy. It was Greece’s first deadly bomb attack in years.