Finance news. My opinion.

Greek Finance Minister George Papaconstantinou began the week with his office protected by baton-wielding riot police taming student protests. Now, investors have him under siege as the country’s bonds tumble.

“Things are difficult, there’s no question about it,” he said in an interview yesterday in his office overlooking Syntagma Square, the hub of downtown Athens. “It’s a very hard fiscal situation. It’s not one that’s not reversible.”

Papaconstantinou, 48, has spent much of the past week reassuring investors and European leaders that Greece won’t default on its $350 billion in debt, its banks will keep access to European Central Bank financing and Prime Minister George Papandreou understands the worst fiscal crisis in 15 years.

Greek bonds plunged to their lowest in seven months on Dec. 9 and stocks slumped after Fitch Ratings cut Greece one step to BBB+, saying Papandreou’s two-month-old government isn’t doing enough to tame a deficit of 12.7 percent of output, the highest in the European Union. A day earlier, Standard & Poor’s put its A- rating on watch for downgrade.

The yield on Greece’s 2-year bond has surged 127 basis points to 3.15 percent this week, driving it above Turkey’s for the first time.

Situation ‘Severe’

“I spent two hours on the phone with the finance minister a couple of days ago, and he understands the position they’re in,” Fitch analyst Christopher Pryce said in an interview on Dec. 9. “I am not convinced that the cabinet, even the prime minister, understand just how severe the situation is.”

European officials added to pressure on Greece. ECB President Jean-Claude Trichet said today that “courageous” action is needed to close the budget gap. Economists pointed to Ireland’s decision to cut wages for public servants, compared with Greece’s 1.5 percent pay increase for most workers.

Papandreou appointed Papaconstantinou, who holds a doctorate from the London School of Economics, after he led the socialists to victory in October elections, winning a 10-seat majority in parliament. While the party won on a platform of higher wages that contrasted with Karamanlis’s pledges for a pay freeze, Papaconstantinou was within weeks forced to publish revised figures that cast doubt over Greece’s fiscal health.

Recession

Data showed Greece’s deficit this year would be more than twice the previous government’s forecasts and four times the EU limit. Other revisions showed that, rather than being one of the few European economies still growing amid the worst global slump since World War II, Greece had been in a recession for a year.

Papaconstantinou defends his government’s strategy to reduce the deficit by more than 3 percentage points of GDP to 9.1 percent next year.

“What exactly has changed in the last 40 days to justify a downgrade?” he said of the Fitch decision installment payday loans.

Greece needs to show that it will do more than rely on optimistic revenue forecasts and one-time measures to achieve those gains, economists say.

“Political pressure is mounting for the government to start taking bold action,” Giada Giani, an economist at Citigroup Inc. in London wrote in a note to investors.

About 75 percent of the current deficit reduction plan comes from raising revenue rather than cutting spending, Deutsche Bank AG estimates. Much of that will come from a crackdown on tax evasion, a chronic problem in Greece that a series of governments have pledged to combat.

New Plan

Now after just two months as finance minister and with the rating companies circling, Papaconstantinou must design a new plan due in January to convince EU leaders that Greece is serious about cutting the deficit and deserves an extension of the 2010 deadline to get its shortfall back within the EU limit.

“Rating agencies and EU institutions will probably want to see much more structural measures than currently announced to tackle the deficit, aimed at permanently and credibly increasing tax revenues and tackling age-related soaring public spending,” Giani said.

The government will announce further deficit measures next week and is committed to cutting spending by 10 percent next year to control the shortfall, Papandreou said in an interview with CNBC in Brussels before a summit of EU leaders today. “There will be some more changes that will make this sustainable so that it’s not a one-off deal,” he said.

Risk Overblown

Nevertheless, talk of a default may be overblown because the rest of the EU would probably help Greece, says the head of the Organization for Economic Cooperation and Development.

“The question of the ratings is perhaps of less consequence than one should think,” said Secretary General Angel Gurria in an interview yesterday.

Papaconstantinou, married with two sons aged 14 and 11, says 10 years as an economist at the OECD will help him argue his case in Europe.

“You have to be able to have a presence around the Eurogroup table; you need to know what you’re talking about,” he said. “Especially because the issues have become infinitely more complicated than they have been in the past.

For now, Papaconstantinou says the force of the bond market isn’t disrupting his life as it might other people.

‘‘Actually I sleep quite well,’’ he said. ‘‘I think that’s one of the big advantages I have. I’m fairly level-headed in general and even though I do worry about things they don’t keep me up at night.”

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