The economic crisis in Greece is now leading to social chaos:
MADRID — Violence erupted in Greece on Wednesday when tens of thousands of demonstrators protesting stringent economic measures hit the streets in Athens, rioters heaved Molotov cocktails and three bank employees died after their building was torched.
The protesters were objecting to cuts in government wages and pensions required by a deal announced Sunday that would give Greece $141 billion in loans from the European Union and the International Monetary Fund, but only if the government promises to restore its tattered finances by imposing program cuts and tax increases.
Police resorted to barricades and tear gas, according to news media reports. Meanwhile, a growing fear that Greece’s debt troubles and civil unrest could soon spread to other European nations spooked investors.
“A demonstration is one thing, and murder is quite another!” Prime Minister George Papandreou bellowed in Parliament during a session to discuss the economic reforms.
The chaos in Greece has raised the pressure on other countries in Europe, such as Spain and Portugal, where the government debt is staggeringly large and the economy relatively weak.
Although the streets of Madrid were quiet and average citizens described themselves as sheltered, at least for now, from the chaos in Athens, the European markets had the jitters once more. Spain’s Ibex 35-stock index lost 2.3 percent. The euro dropped. And in Portugal, Moody’s Investors Service announced that it had put the government bond rating under review for a possible downgrade based on the country’s finances.
In Germany, Chancellor Angela Merkel urged lawmakers to approve their country’s share of the international rescue package for Greece with a dramatic warning.
“Nothing less than the future of Europe, and with that the future of Germany in Europe, is at stake,” Merkel told lawmakers. “We are at a fork in the road.”
Indeed, economists are already talking about fears that it may be too late to stop the Greek crisis from spreading:
MADRID — A third straight day of decline on world financial markets Thursday was vivid evidence of a scary proposition: That the fiscal crisis that began in Greece months ago is spreading across Europe like a virus, causing growing doubts about the fates of even nations with far more manageable levels of government debt.
It is called a “contagion effect,” an economist’s metaphor for the rapid and hard-to-predict spread of financial crisis, driven by the fragility of investors’ perceptions. They are a function of vicious cycles in which confidence in a country’s ability to repay its debts falls, driving up the country’s borrowing rates and thus making it all the harder for the nation to handle its debts.
It leaves countries like Spain, the largest and most economically significant country in the path of the storm–at the mercy of global investors operating under the twin pressures of fear and greed. And it even can be true for countries that have managed their government debt responsibly–Spain has less debt relative to the size of its economy than the United States or Britain–if investors’ views of their likely future deficits or ability to roll over debt shift.
The odds of a full-blown sovereign debt crisis have risen significantly over the past two weeks and especially following market turmoil Thursday, such that Europe in 2010 looks increasingly like East Asia in 1997 and 1998, when a currency devaluation in Thailand sparked a broad crisis in Korea, Indonesia and elsewhere.
This isn’t over yet.