Greek, Spanish anti-austerity protests rock Europe’s fragile financial calm

A fire bomb explodes among riot police during clashes in Athens, Wednesday, Sept. 26, 2012. (AP / Nikolas Giakoumidis)

ATHENS -- Europe's fragile financial calm was shattered Wednesday as investors worried that violent anti-austerity protests in Greece and Spain's debt troubles showed that the region still cannot get a grip on its financial crisis and stabilize its common currency, the euro.

Police fired tear gas at rioters hurling gasoline bombs and chunks of marble Wednesday during Greece's largest anti-austerity demonstration in six months -- part of a 24-hour general strike that was a test for the nearly four-month old coalition government and the new spending cuts it plans to push through.

The brief but intense clashes by a couple of hundred rioters participating in the demonstration of more than 60,000 people came a day after anti-austerity protests rocked the Spanish capital, Madrid. On Wednesday, Spain's central bank warned that the country's economy continues to shrink "significantly," sending Spanish stock index tumbling and its borrowing costs rising.

Across Europe, stock markets fell as well. Germany's DAX dropped 2 per cent while the CAC-40 in France fell 2.4 per cent and Britain's FTSE 100 slid 1.4 per cent. The euro was also hit, down a further 0.3 per cent at $1.2840.

The turmoil Wednesday ended weeks of relative calm and optimism among investors that Europe and the 17 countries that use the euro might have turned a corner. Markets have been breathing easier since the European Central Bank said earlier this month it would buy unlimited amounts of government bonds to help countries with their debts.

The move by the ECB helped lower borrowing costs for indebted governments from levels that only two months ago threatened to bankrupt Spain and Italy. Stocks also rose. Media speculation about the timing and cost of a eurozone breakup or a departure by troubled Greece faded.

However, the economic reality in Europe remained dire. Several countries have had to impose harsh new spending cuts, tax rises and economic reforms to meet European deficit targets and, in Greece's case, to continue getting vital aid. The austerity has hit the countries' populations with cut wages and axed services, and left their economies struggling through recessions as reduced government spending has undermined growth.

"Yesterday's anti-austerity protests in Madrid, together with today's 24-hour strike in Greece, are both reminders that rampant unemployment and a general collapse in living standards make people desperate and angry," said David Morrison, senior market strategist at GFT Markets.

"There are growing concerns that the situation across the eurozone is set to take a turn for the worse."

Spain has struggled for months to convince investors that it can handle its debts. The government is to unveil an austere 2013 draft budget and new economic reforms Thursday. Many believe they could be a precursor to a request for financial help from the ECB. The government has already introduced C65 billion in austerity measures designed to bring down its deficit.

The country is suffering its second recession in three years, with a predicted 1.5 per cent economic contraction in 2012, and has 25 per cent unemployment. The Bank of Spain warned Wednesday the recession could be deeper.

Spain has come under pressure to tap the ECB bond-buying program that has been partly designed to keep a lid on the country's borrowing costs. So far, the government has been reluctant to ask for help for fear of the conditions that may be attached.

Spain's IBEX stock exchange fell in 4 per cent on Wednesday while the interest rate on its 10-year bonds rose 0.26 percentage points to 5.99 per cent on concerns about the country's economy and that it is taking too long to make up its mind about applying for ECB assistance.

"The demonstrations remind us that central bankers cannot solve the crisis alone. The ECB's plan to intervene in sovereign bond markets can only succeed if governments in crisis countries can convince their electorates that ongoing austerity and reform are necessary to avoid bankruptcy," said Martin Koehring of the Economist Intelligence Unit.

"This, however, is increasingly challenging without the return of economic growth."

Greece, meanwhile, has been dependent since May 2010 on billions of euros in two rescue loan packages from other eurozone countries and the International Monetary Fund. In return, it slashed salaries and pensions and hiked taxes in an effort to reform an economy derailed by decades of overspending and corruption.

Although Greece accounts for only about 2 per cent of the eurozone's total economy, its crisis has shaken the euro and led to concern it could destabilize other, much larger economies in the 17-nation bloc. Greece is in its fifth year of recession, with unemployment above 24 per cent.

Shortly before Greece's strike got underway, Prime Minister Antonis Samaras and Finance Minister Yannis Stournaras hammered out a C11.5 billion ($14.87 billion) package of spending cuts for 2013-14 demanded by the country's international lenders, along with another C2 billion in improved tax collection.

The government has struggled to come up with austerity measures acceptable to the country's creditors, with disagreements arising between the three coalition parties. The next payment of C31 billion hinges on the further cuts.

Stournaras was briefing the other two party leaders Wednesday, and Samaras was to meet with them Thursday morning. If they agree, the package will be presented to Greece's debt inspectors.

Wednesday's strike shut down Greece's famed Acropolis and halted flights for hours. Ferry services were suspended, schools, shops and gas stations were closed and hospitals functioned on emergency staff.

While the demonstration began peacefully, a couple of hundred protesters broke away to smash paving stones and marble facades to use as missiles against riot police, leading to clashes that petered out after about an hour.

Eight policemen were injured, including one hit by a gasoline bomb, and 21 people were arrested, police said. At least two demonstrators were also injured.

Government spokesman Simos Kedikoglou said the limited violence and what he called a smaller turnout than opposition parties had hoped for showed that "Greek society understands what the government is doing is the only possible solution."