The global financial system is facing a tough challenge. On Tuesday significant drops were seen both in European and US stock exchanges. It is doubtless that such sharp movements were also observed in the near past, so remaining calm might be a good thing to do. However a rumor about Spain is addressed as one of the reasons behind the fall in stock exchanged. Web pages are occupied by numerous scenarios pertaining to the budget deficits, debt repayments over the years ahead for Greece, Portugal, Spain, Ireland, and Italy and the European countries which hold the Treasury bills issued by these countries. And we should note that his happened despite the announcement of a bailout plan for Greece.

Even if this tendency does not prevail on the days ahead, there exists a wound, and it is 'itching'. The wound is quite large; it is estimated that European banks hold $1 trillion of the bills issued by Greece, Portugal, and Spain. The risk is especially higher for France and Germany. This is where the problem stems from. Under normal circumstances it is possible to ease and eliminate the risk by disciplining the fiscal policies of the indebted countries; i.e. by strengthening the economic fundamentals. But this cannot be accomplished overnight; it takes times. In the meanwhile, the appetite of speculators tends to grow. The worst part is even if you implement the measures to improve the economic foundations, such pessimistic expectations and the resulting trading transactions push up the borrowing interest rate the country has to bear in turn decomposing the fundamentals. Prime Minister of Spain denied this rumor strictly. Spain's condition is in fact different than Greece and Portugal. For instance the ratio of public debt to gross national product is not high. Nonetheless if the speculations do not stop European banks might encounter a new shock before overcoming the demolishing effect of the global crisis.

What makes the situation even more complicated was the negative reaction of the Greek people to the bailout package. It is evident that Greece should keep its promise in order for the fund transfer to Greece in the context of the agreement reached between the IMF and the EU to be realized. But the problem is; Greece will have to introduce cuts in the salaries of public employees and pensions. 70 percent of the budget expenditure of Greece goes to salaries and pensions. In order to overcome the debt cycle Greece has to improve the budget radically. One way to do this is to cut the expenditures on such payments. The announced program also involves measures to increase tax revenues. Raises in value added tax is to come. In addition tax imposed on luxury consumption, cigarettes, petroleum products, and electricity consumption will be increased.

But how can you implement an economic package the public does not give approval to? This situation increases the risks perceived about Greece. When considered along with the speculations against Spain, EU is going through tough times. In the weekend EU countries announced that they will extend €80 billion to Greece through bilateral agreements. It was also announced that Greece will sign a three-year stand-by agreement with the IMF. In this context the IMF will extend €30 billion to Greece. This amount corresponds to 3200 percent of Greece's credit quota at the IMF. Turkey was one of the countries that received credits exceeding the quota amount the most. This rate for Greece is all-time high. Given the amount to be extended by the EU countries, it can be argued that this is the biggest 'bailout' operation ever.

These Steps taken about Greece seem to have gone 'too far' given the concerns about Portugal which might prove correct and the speculations on Spain. These developments also pose risks about the future of Euro. Let us wait and see how things will evolve: will the tension ease or will a big speculative attack take place?

This commentary was published in Radikal daily on 06.05.2010