Papandreou Long on Rhetoric, Short on Details

So far it does not appear that Greek Prime Minister Papandreou has provided much insight into how he will reduce Greece's heavy debt burden. Public debt is about 113% of GDP this year and set to rise toward 120% next year.

The most important take away point is that key decisions will be made over the next three months and the pain will be distribution.

The speech seems to be trying convince his electorate and investors that radical action will be taken and that the measures will transform Greek society and economy. The usual targets, like tax evasion and corruptness will be attacked. He will reduce the administrative layers of government to 3 from 5. Labor market and health care reforms are also envisaged. Pension reform is likely to be delivered a bit later with Papandreou citing end of Q2 as a likely time frame.

Papandreou is expected to provide more specific details next month on his intention to cut the deficit by 3-4 percentage points in 2010 in an updated stability and growth plan. Debt will begin being cut in 2012. Papandreou projects the deficit will fall under 5$ by 2012 and under 13% by 2013.

Ironically, Papandreou was elected in October on a platform calling for more spending and higher wages to spur growth. Now he is being forced to at least partially bite the hand that fed (elected him). There is talk of a pay freeze of up to 3-years for civil servants, review of public sector bonuses.

EU rules are far from clear and therefore investors cannot be completely sure that the Europe will stand behind Greece, The Maastricht Treaty prohibits governments from bailing each other out, other clauses appear to anticipate financial assistance for countries in need. That said there is some scar tissue, Greece joined EMU in 2001 and later it became clear that it made it only because it had understated the budget deficit.

It is important that Greece stops the bleeding post haste. The ECB accepts bonds rates BBB- for collateral, but by the end of next year the ECB is likely to revert to its pre-crisis practice of requiring a minimum of A- collateral.