Greek leader: Debt woes could spark second financial crisis (Roundup)

Mar 8, 2010, 23:34 GMT

Washington - Greek Prime Minister George Papandreou warned Monday that his country's debt woes could lead to a second global financial crisis, challenging Europe to stand behind its struggling members and the US to crack down on financial speculation.

Speaking in Washington ahead of a meeting Tuesday with President Barack Obama, Papandreou said Greece's massive debt was already impacting Europe and could well have a 'domino effect' that would raise borrowing costs for a host of other indebted countries.

'If the European crisis metastasizes, it could create a new global financial crisis with implications as grave as the US-originated crisis two years ago,' Papandreou said in a speech before the Brookings Institution, a Washington-based think tank.

Secretary of State Hillary Rodham Clinton praised the Greek leader for tackling the country's burgeoning debt, noting that the world's long-running economic crisis had 'drained government coffers in both the United States and Greece.'

'We support Greece and the tough economic measures it is taking to address this issue,' Clinton said after meeting with Papandreou.

In the hopes of curbing a budget deficit that has ballooned to 13 per cent of economic output, Greece has proposed steep budget cuts and tax increases that have sparked a wave of protests on the streets of Athens in recent weeks.

The ongoing crisis has severely weakened the credibility of the 16-member euro-zone and sparked deep divisions within the European Union over whether the bloc should step in. Papandreou criticized the EU for not strongly backing Greece during the crisis.

'This is not about asking Europe to rush to the aid of a reckless country,' Papandreou said. He warned that a lack of joint action would lead to 'a slower recovery for all of Europe.'

Papandreou was not to ask Obama for direct help during the White House meeting Tuesday, but he called for the United States and Europe to work together on curbing financial speculation that many believe exacerbated Greece's debt crisis.

'Unprincipled speculators are making billions every day by betting on a Greek default,' Papandreou said, blaming the tactic for raising Greece's borrowing costs and calling market manipulation the 'scourge that haunts Greece and all of us.'

Clinton acknowledged that financial instruments 'have been used to the detriment not only of Greece but of other countries, including our own.' The Obama administration was looking into regulatory measures 'so that we can avoid these kinds of consequences from an unregulated financial market.'

US Federal Reserve Chairman Ben Bernanke said last month that the central bank was investigating whether Goldman Sachs and other financial firms may have helped Greece hide its debts over the last decade.

Papandreou's government revealed shortly after it came into power in October that the country's debt was double what the previous government had said, plunging the euro-zone into the worst crisis in its history.