Is Greece the Victim of Speculative Attacks?

I went to a Center for American Progress press event showcasing the Greek prime minister this morning, and one of the slightly improbable ways he showcased to deal with his country's crisis was . . . American financial regulation. I mean, our debt problem is bad, as discussed yesterday. But I don't think it's actually infectious.

Of course, what he meant was that he didn't want "speculation" undermining his country's fiscal recovery. The recent Greek foray into the private debt markets was a success in that it was actually oversubscribed, and the interest rates were down from where they had been, indicating some level of confidence in the fiscal future of the Greek government. But the interest rates still reflected a hefty risk premium, and over the long run, the prime minister says that's unsustainable.

Unfortunately, I expect that Greek debt will be carrying a substantial risk premium for quite some time, reflecting the fact that the debt is, well, riskier than the debt of bigger and richer nations. The Greek economy remains quite dependent on tourism and agriculture, both of which are subject to rather sudden shocks. Its institutions are often quite weak, and corruption and tax evasion remain serious problems. Mr. Papandreou says that higher interest rates for some members of the euro-zone means that the countries paying the higher rates will be strongly disadvantaged. But given the economic and political realities, paying interest rates on par with Germany, or even Ireland, is not likely in the cards.

Thankfully, Mr. Papandreou stopped short of actually claiming that speculators were the main reason for his country's debt problems; he emphasized that he just wants to make sure that speculation doesn't undermine all his good work in getting the budget under control. But if he actually gets the budget under control, and keeps it there, he won't have to worry about speculation, because people will start betting on Greece's success.