An icy German greeting for Greece

There's every chance Greek Prime Minister George Papandreou will be the most disappointed man in Europe after his meetings with German chancellor, Angela Merkel later today.

Papandreou received warm commendation from European leaders for the tough $US6.5 billion in budget cuts he announced on Wednesday. And Greece was also cheered on by financial markets.

While angry public servants blockaded the main finance ministry building in central Athens overnight to protest against the austerity measures – which included cuts to the bonus payments for public servants and a freeze on pension payments – Greece returned to financial markets for the first time in two months.

In what was a critical deal for both Greece and the entire eurozone, Greece raised $US6.8 billion ($A7.6 billion) in 10-year bonds, dispelling fears that the heavily indebted country could find itself barred by international financial markets. Demand for the 10-year bonds was very strong. However, Greece was forced to offer a very high interest rate of around 6.4 per cent. This is much higher than existing Greek 10-year bonds and about twice that of Germany .

If Greece is forced to pay higher interest rates on the $68.3 billion of debt it has maturing this year, it will place an intolerable burden on the country's finances. The Greece economy will inevitably contract as a result of the steep budget cuts, which will lead to a sharp decline in tax revenues. A steep rise in the country's interest payments would exacerbate the country's downward spiral.

What's more, there's no guarantee that the country won't face an even higher interest bill on the $27 billion in funding it needs to raise over the next three months.

Which is why Papandreou will be looking for direct financial support when he meets with German chancellor, Angela Merkel later today.

But Merkel has downplayed the significance of the meeting, saying that it was about good relations between Germany and Greece, rather than financial aid. She has little choice. German public opinion remains staunchly opposed to a Greek bail-out. The extent of the hostility was evident overnight when two members of Merkel's own centre-right coalition were reported in the German press as suggesting that Greece consider selling property, company shares and uninhabited islands to reduce its debt burden.

Even Germany's financial press is reticent about supporting a bail-out, citing the moral hazard argument against bailing out big-spending eurozone members.

There is a fear that if Germany comes to the assistance of Greece, it will eventually be called upon to support other 'southern' eurozone members, such as Portugal, Spain and Italy. What's more, it's unclear how much support will be required. Will Germany be required to commit to underwriting one or two bond issues, or will it be required to guaranteeing the US$68.3 billion of debt that Greece has maturing this year (Full coverage: Greece's debt crisis).

All of which makes it likely that at tonight's meeting Merkel will greet her Greek guest, congratulate him warmly on his austerity measures and the success of the Greek bond issue. And then confine herself to vague assurances about the future of the eurozone, and the euro.