Wave of anger blankets Athens as Greece weighs new austerity measures

Young Greek protesters in Athens are confronting police outside parliament ahead of a proposed new austerity budget, even as European leaders meeting in Brussels last night remain divided on how to finance a second Greece bailout.

The some 20,000 protesters – many of whom refer to themselves as "indignants" – crossed police lines, angry about what they perceive as a future riddled with debt and high unemployment.

Protestors want to stop an austerity package of $40 billion in cuts whose approval is required for the next installment of last year's 160 billion bailout. Greece slipped toward bankruptcy in spring 2010 after revealing it had falsified its financial position. Athens has since received $53 billion in bailout funds, following a contentious debate in Europe, particularly in Germany, which initially opposed a bailout.

Yet Greece now desperately needs a second cash infusion. Last night, Jean-Claude Juncker, head of the eurozone finance ministers, set a June 20 deadline to complete a bailout package for Greece, even as analysts say that the longer the Greek crisis remains unresolved, the more words like “default” and “restructuring” threaten to undermine the Greek position and cause market panic that could ripple even into US holdings.

What European officials are said to want is a restructuring of Greek finances – but without quite calling it a restructuring. That Greece, a founding member of the eurozone, would default, or even be rated as a “selective default” in industry terminology, is seen as uncharted territory.

“The best scenario is you don’t talk about restructuring and you do it quickly over a weekend,” says Sony Kapoor, director of “Re-define,” a Brussels think tank. “The worst is you talk about restructuring a lot and then do nothing. That’s sort of where we are. For Greece, today, it cannot honor its obligations. Most of the damage has already been inflicted.”

Greece holds some $400 billion in bond debt. Of this, $123 billion matures and must be paid off by 2014. Standard and Poor’s this week dropped Greece’s rating from B to triple C, the lowest in the world. (Moody’s rating agency today threatened to downgraded three French banks on their exposure to Greece. France has $14 billion bank exposure to Greece; Germany has $21 billion.)

“The situation in Greece is very tense right now,” says Phillippe Waechter, chief economist at Natixis, a French investment management group. “There are no margins; the Greeks need some breathing space.”

While few analysts predict a cataclysmic scenarios of European breakup stemming from the Greek crisis, it is nonetheless seen as furthering long term strains of disunity, a rich-poor North-South Europe, and a lack of trust in institutions and many of the ideals Europe was founded on.

Both Ireland and Portugal have experienced the cost of fearful market behavior in the past year, as rising debt-servicing costs helped bring down both governments.

Prime Minister Georges Papandreou's proposed austerity plan, to be presented today, would cut $40 billion, partly by laying off one-fifth of all government workers. A privatization component of the plan is expected to raise $70 billion.

On Friday, German Chancellor Angela Merkel and French President Nicolas Sarkozy are expected to meet on how to resolve two different approaches to an expected second bailout. The German plan would essentially prolong for several years the maturity of current bonds giving Greece more breathing room to pay them off. The other plan, proposed by the European Central Bank and backed by France, favors a voluntary repurchasing of current Greek bonds by those holding them.

"It is really a question of finding a means of avoiding outright default, by going for a solution that would either extend the maturity of Greek bonds or encourage creditors to voluntarily renew their bonds on maturity,” says Mr. Waechter. “Whatever it might be, the priority is to give breathing space to the Greek economy. A real payment incident, i.e. straight default, could prove very dangerous for Europe, in terms of its overall credibility, and also because European banks and insurance companies are heavily exposed to the Greek economy."

Mr. Kapoor adds; “Headlines and market reaction are key to this situation. Given that economies depend on what markets perceive, it is impossible to think that markets will not affect economic realities,” he says. “The longer this issue stays in the headlines, the more the politics get damaged.”