Talks ended late Monday night in Athens and were to resume on Tuesday. Greek Finance Minister Evangelos Venizelos said in a news release that the talks had been productive.
Standard & Poor’s lowered Italy’s credit rating one notch early Tuesday, to A from A+ with a negative outlook. Asian markets traded lower after the downgrade. Japan’s Nikkei 225 index ended its morning session down 1.4 percent.
Europe has been battling for nearly two years to show convincingly that Greece and other heavily indebted nations such as Italy and Spain will pay all their bills. World markets remain skeptical, and have pushed up borrowing costs for governments and banks throughout the 17 nations that share the euro as a currency. The European Central Bank on Monday released new data showing that it has purchased more than $200 billion in government bonds, much of it in recent weeks to hold down the interest rates paid by Italy and Spain.
The issue is a key concern to U.S. policymakers, who worry that a Greek or other government default in Europe could trigger bank failures, throw the region back into recession — and drag down the U.S. economy in the process.
The head of the International Monetary Fund’s mission to Greece said Monday that the country’s pace of reforms had been slowing, and he called for the government to pick up speed. Greece has promised to reduce the size of public payrolls and sell off inefficient state-owned enterprises, but it has failed to follow through as quickly as expected.
Markets were down around the world Monday on fears that Greece would have difficulty qualifying for the additional bailout money. Major European stock indexes — Germany’s DAX, France’s CAC and the Euro Stoxx — closed down about 3 percent Monday. In the United States, the Dow Jones industrial average and the Standard & Poor’s 500-stock index lost nearly 1 percent.
European officials and the IMF will not release the next round of emergency lending until Greece details how it plans to meet its deficit-reduction targets.
“We expect the Greek authorities to explain, in particular, how they intend to close the fiscal gaps in 2011 and 2012 and how they plan to proceed with the structural reforms and privatizations,” said Amadeu Altafaj Tardio, a spokesman for the European Commission.
European economics officials met during the weekend to discuss the Greek debt crisis but went home with no firm deal to authorize the money, saying that a final decision would have to wait at least two more weeks.
Greece has proposed painful measures to meet steep targets that it agreed to as a condition of receiving the bailout money, including deep pay cuts, furloughs and layoffs in the public sector and higher taxes. So far, many of the proposals have remained just that, although they have provoked violent opposition in the streets of Athens.
The delay in releasing the newest installment of bailout money was caused in part by frustration that not enough of the proposals have been made into law.
Reforms “have now become much more incremental,” Robert Traa, the head of the IMF delegation in Athens, said Monday. “Greece is still well away from the critical mass of reforms needed.”
In a bid to dig itself out from more than $400 billion in outstanding loans — 150 percent of the country’s annual economic output, Greece has imposed higher income taxes and, last week, a emergency property tax that it will levy through electricity bills to make sure it is actually collected. Tax evasion is endemic in Greece, and Traa said that rather than continue to raise taxes, the country should simply concentrate on collecting the ones it’s already owed.
The depth of Greece’s recession is worse than its creditors had forecast when they set out the terms of the bailout, and joblessness is spiraling, meaning that tax receipts are wavering even though the tax rates are going up. Meeting the bailout targets is getting harder.
“This is a double-edged sword,” said Panos Tsakloglou, an economist and adviser to the Greek Finance Ministry. “We are in the middle of a crisis, and some of these reforms in the short run may make the crisis worse, but in the long run they are important for the competitiveness of the economy.”
Greek Prime Minister George Papandreou canceled a trip to the United States to handle the crisis at home, as a draft of new possible cuts circulated in Greek media that included pension freezes, deeper furloughs and health spending cuts. The outstanding $11 billion is just a small installment of a $150 billion bailout approved last year. A second bailout — another $145 billion — was announced over the summer but has not been approved.
If Greece defaults on its debts, it could set off a chain reaction across Europe, since the government in Athens has borrowed money from banks in other countries. Those banks, in turn, borrowed from still more banks — meaning that fearful banks could stop lending to each other altogether if Greece defaults, as in the United States after the failure of Lehman Brothers in 2008.
In Germany, which would bear the largest portion of any bailout, elections on Sunday further underlined the challenges the ruling coalition has in convincing voters — and its own elected members — to further support troubled euro-area countries.
The government’s junior coalition member, the pro-business Free Democrats, won only 1.8 percent of the vote in local Berlin elections, not enough to qualify for the city-state’s parliament, continuing a string of defeats that have party officials panicked about their future.
Schneider reported from Washington.