Greece sets its own price

Market courage will be sorely tested this week, as Athens again readies itself for a showdown with Europe over the terms of its bailout, at a time when investors are becoming increasingly concerned that central banks appear reluctant to act in the face of faltering global growth.

This time last week, Europe was congratulating itself after the conservative New Democracy party of Antonis Samaras won a narrow victory over the radical leftist Syriza party, which threatened to shred the country's hated 'austerity program'. But this optimism was short-lived, with Samaras himself now insisting on "substantial” changes to the reform program the country agreed to in exchange for its latest €130 billion ($US163 billion) bailout.

Even worse, the stoush between Athens and the 'troika' – officials from the European Union, the European Central Bank and the International Monetary Fund – which was due to start later today has had to be postponed because both the country's new prime minister and its new finance minister are in hospital. Samaras is recovering from an urgent eye operation on Saturday morning, while Vassilios Rapanos, the country's new finance minister, underwent medical tests on the weekend after collapsing on Friday, complaining of dizziness and nausea.

The stoush had been expected to centre on Greece's failure to achieve its targets to boost tax revenues, and to introduce much-needed economic reforms amidst the political paralysis that has gripped the country in recent months. Athens was expected to ask for an extra two years to achieve its budgetary targets. (Brussels estimates that each year's delay will force the bailout to be increased by €20-€25 billion).

But Europe has been shocked by a policy document published on the weekend that makes it clear that Athens' demands go much further than this. The new Samaras coalition government is demanding "at least two years” to achieve the country's budgetary targets.

In addition, Samaras wants to extend the payment of unemployment benefits by a year, and to allow small business owners whose businesses have failed to collect benefits. Samaras is also proposing extensive tax cuts, including reducing the value-added tax from 23 per cent to 9 per cent for restaurants, in order to boost tourism.

Although Greece had previously promised to cut the size of the public service by 150,000 – including 15,000 this year – Samaras is now proposing a freeze on public sector lay-offs. According to the document, Greece now wants to "avoid reducing the number of permanent public servants and to save on non-salary costs by reducing bureaucracy.”

According to the document, "the general aim is for no more reductions to salaries and pensions and no more additional taxes."

Signs of Greek resistance will inflame existing tension within the eurozone. Countries such as Germany, the Netherlands and Finland favour taking a hard-line stance with the Athens in order to force the country to cut its budget deficit and introduce reforms. In a newspaper interview published on Sunday, German finance minister, Wolfgang Schuble, warned that Greece should get on with implementing reforms, "instead of asking how much more others can do for Greece.”

But other countries, such as France, want to adopt a more lenient approach, arguing that with the Greek economy set to shrink by at least 7 per cent this year, there is no way that Athens will reach its target of reducing its budget deficit to 7.3 per cent of GDP this year.

Meanwhile, the latest delay in negotiations means that Greece is unlikely to receive its next €3.2 billion payment from its bailout program, which was due to be paid this month, putting even greater pressure on the government's finances. Without extra funding, the Greek government is likely to run out of money to pay pensioners and public servants – and its foreign lenders – by July 20.

Investors are now worried that signs of fresh troubles in Greece, combined with worries over faltering global growth and disappointment at central bank inertia, will put further pressure on risk assets, such as shares and commodities.

Last week, the Reuters-Jefferies CRB index, which measures prices of a basket of commodities, slumped to its lowest level since September 2010. The index has dropped 28 per cent since touching its cyclical high 13 months ago as investors have become increasingly glum about the outlook for global growth.

Meanwhile, market appetite for risk also ebbed after Goldman Sachs recommended shorting the US stock market, and after the ratings agency Moody's downgraded the ratings of 15 major international banks.