Europe's relief from Greek vote likely fleeting

Associated Press
Supporters of the New Democracy conservative party celebrate at an election kiosk  at Syntagma square in Athens, Sunday, June 17, 2012. The pro-bailout New Democracy party came in first Sunday in Greece's national election, and its leader has proposed forming a pro-euro coalition government.(AP Photo/Kostas Tsironis)
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ATHENS, Greece (AP) — Greece's election result has eased fears of imminent financial disaster for Europe, but the continent's leaders are still searching for a way to contain a debt crisis that threatens the global economy.

A narrow victory for the New Democracy party in Greece means that the country is more likely to stick to the harsh austerity terms of its €240 billion ($300 billion) bailout and not face a chaotic exit from the euro in the very near future — an event many fear would destabilize Europe and send shockwaves through the world.

The country's economy is still in a very vulnerable state, however. It is in a fifth straight year of recession and could easily deteriorate to point where a default and euro exit were inevitable.

Europe is struggling to put out several fires, not just the one in Greece. Heavily indebted Spain and Italy saw their borrowing costs rise Monday, increasing pressure on their government finances and keeping alive fears that another big bailout might be needed. That would considerably strain the eurozone's ability to protect its members and keep the currency union together.

"The crisis is far from over," Commerzbank analyst Christoph Weil said in a note to investors. "A sovereign default by Greece and the country's exit from the monetary union have probably been avoided for the time being. "

The eurozone's challenges run deep. The economy is expected to shrink this year, with the so-called peripheral countries like Greece and Spain in painful recession. Many of its banks remain on life support, propped up by emergency credit from the European Central Bank.

Europe is a substantial trading partner with the rest of the world. If it falls into a deep recession sparked by a default in Greece or a massive bailout for Spain, orders for goods made in the U.S. and China are going to start falling off.

No clear route out of the crisis has been laid out, and expectations are uncertain whether a June 28-29 summit of European leaders in Brussels will prove any more convincing than previous ones that failed to restore confidence.

"The crisis in Greece and the eurozone remains intense," Fitch Ratings said. "While the risks from Greece have fallen for now, the severity of the systemic crisis engulfing the eurozone is unlikely to diminish until European leaders articulate a credible road-map that would complete monetary union with much greater fiscal and financial integration."

One beneficiary of Sunday's result in Greece may be President Barack Obama, who has urged European leaders to take more vigorous action to avoid a threat to the U.S. and global economies. The election win for New Democracy increases the likelihood that any disruptive Greek exit from the eurozone would not happen until after Obama's contest with challenger Mitt Romney in the November U.S. presidential election, rather than before.

Key developments Monday:

GREECE — Cleanup crews swept up Athens' central Syntagma Square and took down election posters as Greeks waited for the formation of a new government that's unlikely to bring any immediate relief to the suffering of people who have lost jobs and small businesses in a 5-year-old recession and financial crisis.

New Democracy was starting talks to form a coalition government Monday morning after securing a narrow victory over left-wing Syriza, which advocated rejecting the deep spending cuts demanded in return for its bailout from other eurozone governments and the International Monetary Fund. A coalition partner could include old socialist rival PASOK, which led the country until late last year.

"We'll breathe easier when there's a government in place," said George Moutafidis, who runs a sandwich shop in the Syntagma Square. "Yesterday's result is somewhat positive, but we need a government in place to start making decisions."

Greece faces a difficult road no matter who is in charge. The economy has shrunk for five straight years, unemployment is at 21.7 percent, and 52.7 percent for under-25s. Credit has dried up for businesses as Greek banks struggle and wary lenders from abroad hesitate to trust businesses with bleak futures.

Continued bailout money hinges on keeping to the terms of an agreement to cut spending and make Greece's bureaucracy-choked economy more business friendly so it can grow out of its troubles in the long term.

Yet Greece's plummeting economy is making it harder for it to reduce its budget deficit by the required about. Failure to keep to the bailout deal could result in an aid cutoff, leaving the government unable to pay its obligations.

The previous government said Greece would run out of money July 20 if more funds are not received.

A New Democracy-led government would open the way to talks with international creditors on getting it more time to fix Greece's finances. European officials are signaling a willingness to talk.

However German Chancellor Angela Merkel indicated that finding room for negotiation might not be so easy. Talking to reporters at the G20 summit in Mexico, Merkel insisted that Greece had to hold its side of the bargain and that "we have to count on Greece sticking to its commitments." This appeared to dial back remarks late Sunday by German Foreign Minister Guido Westerwelle. He said Greece had to implement all agreed reforms, but that "I can well imagine talking again about timelines."

Many analysts think Greece may still wind up leaving the euro, either to improve its economy's competitiveness through introducing a weaker currency, or because it may need to print its own money to bail out banks or pay salaries when it can't get credit anywhere else.

The country was originally supposed to identify €11.5 billion in budget cuts for the next two years year by the end of this month. That deadline has probably slipped, and the new government may seek to make the cuts over a longer period.

However giving Greece more time to close a budget deficit now estimated at 6.7 percent this year raises new complications. Money will have to be found to cover the large deficit, and Greece is unable to borrow on bond markets to do that. Analysts have suggested Europe's leaders might have to eventually give Greece easier terms on repaying money owed to the European Central Bank or the IMF, or tap €50 billion in funds committed to recapitalizing its banks.

SPAIN — Spain's borrowing costs spiraled higher in a sign markets remained deeply skeptical about Europe's chances to contain and end the crisis. Interest rates, or yields, on 10-year government bonds — a key indicator of how bad the crisis is — spiked to just over 7 percent. That indicates increasing doubt that the country will be able to manage without a bailout like the ones received by Greece, Ireland and Portugal.

Yet Spain is bigger than the three bailout countries combined, and would stretch the eurozone's €500 billion bailout fund if help were needed. The country has already asked for €100 billion to bailout its banking system, weighed down with heavy losses on bad real estate loans.

Italy has also been caught up in concerns that it might soon be able to keep a lid on its debt without help. Its economy is the third largest in Europe, after Germany and France, but it has a massive amount of debt. The worry is that if Italy's economy continues to slow, it won't be able to maintain its debt. Italian bond yields Monday rose to 6.07 percent.

BRUSSELS: Meanwhile, Europe's governments are struggling to agree on measures to put new foundation under the euro. Without agreement on bold new steps, the June 28-29 summit of European leaders may fall short of expectations and lead to even more market tension — as such several such summits have typically done in the past.

Hopes are high for a substantial response from governments during the summit, which will include leaders such as German Chancellor Angela Merkel and France's president, Francois Hollande.

Merkel has sought to lower expectations for big steps at the summit, but European Central Bank President Mario Draghi, one of those working on proposals for the meeting, said last week that "markets and people need to be reassure that we are still traveling together."

European leaders have conceded the euro's foundations were flawed when it was introduced in 1999. Rules against big deficits failed to keep governments from running up too much debt through overspending, as in Greece, or needing to bail out banks, as in Ireland and Spain. Proposals could include some form of common borrowing, tighter central EU control of individual countries' spending and debt, and centralized supervision and bailouts of weak banks.

Yet all proposals are controversial because they involve countries giving up authority over their finances, and Germany, the biggest eurozone member and in relatively good shape, is opposed to being put on the hook for other people's debts.

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McHugh contributed from Frankfurt, Germany.

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