The weekend arrest of International Monetary Fund boss Dominique Strauss-Kahn, for allegedly assaulting a maid in a top New York hotel, prompted howls of dismay from Greek newspapers.

“The maid blocks Greece”, was the headline in the leftist daily newspaper Eleftherotypia, while the more conservative newspaper Kathimerini considered it a case of “Greece in doubt”.

The strong personal relationship between DSK (as he’s referred to in the French media) and Greek Prime Minister George Papandreou — both of whom are Socialists — is generally considered to have been a key factor in the €110 billion bailout package that the IMF and the European Union cobbled together last May.

It was to DSK that Papandreou first turned when he discovered the size of Greece’s budget deficit. While European politicians dithered, DSK quickly reached the decision that Greece needed a rescue package.

But Greece’s position now looks dire. DSK is now being held without bail pending his trial, while European leaders remain at loggerheads over what to do about Greece’s deteriorating finances.

A team from the IMF, the European Commission and the European Central Bank — known in Greece as the “troika” — is currently in Athens examining Greece’s progress in implementing its austerity measures. The early signs are that the country is not meeting its targets: its tax revenues are falling short, and the economy is shrinking, partly as a result of the austerity measures. Relations between the troika and the Greek government are becoming increasingly strained.

At the same time, the eurozone’s two major economies are in disagreement over what course of action to take. Germany is arguing in favour of rescheduling of Greek debt, including that held by private investors, such as banks and pension funds. France, on the other hand, wants to provide additional rescue funds for Greece, and there’s talk of an extra €60 billion in emergency funding.  The only thing that the two sides agree on is that Greece needs to embark on further reforms, and find extra ways to cut government spending.

The worry is that ordinary Greeks are becoming increasingly disenchanted with the country’s ongoing austerity measures, and are increasingly tempted by the idea of the country defaulting on its debts.

According to the German publication, Der Spiegel, a new “I Won’t Pay” movement has sprung up in the country.

“Its members are refusing to pay the price for the crisis. They are hampering the operation of toll booths on the expressway, taping over coin slots on ticket machines for buses and trains or simply dodging fares. They plan to call for resistance to a patient fee for visiting doctors and they want to organise a tax boycott. The movement already has at least 10,000 members, its organisers claim, noting that ‘a new committee is added’ every day.”

According to Der Spiegel, most of the membership of the “I Won’t Pay” movement consists of ordinary middle-class people, along with the unemployed.

And this is why markets are so rattled by the situation in Greece at present. It is one thing for eurozone politicians and bureaucrats to prescribe more austerity measures for Greece, but if the Greek population rejects them, the measures simply won’t be implemented.

Handled properly, Greece’s debts could be rescheduled, without roiling markets. The risk at the moment is that investors are beginning to question the ability of eurozone politicians and policy makers to be able to come up with a plan for rectifying Greece’s deteriorating finances. If investors ultimately lose confidence, we could be in for a complete re-rating of risk around the world, which would spark a huge sell-off in markets.

*This article first appeared on Business Spectator.

Peter Fray

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