Greece’s New Leaders Act Swiftly to Reverse Austerity

Measures to Halt Privatizations, Rehire Public Workers Trigger Greek Market Selloff

The Wall Street Journal

By MATTHEW KARNITSCHNIG and  STELIOS BOURAS

Jan. 28, 2015 5:46 p.m. ET

Greece’s new leaders moved swiftly to reverse the reform course imposed on the country by its creditors, dashing hopes in Europe that the leftist government would soften its approach and triggering a steep selloff in Greek stock and debt markets.

Within hours of taking office, government officials said they would stop the planned sale of the state’s majority stake in Greece’s largest port and dominant utility. They also pledged to rehire thousands of public-sector workers and reopen the country’s state broadcaster, which had been shut down by the previous government.

The moves scuttled the expectations of some European officials that Greece’s new leadership would retreat from its radical campaign platform after attaining power. Greek stocks plummeted more than 9%, with the country’s four main banks falling more than 25%. The yield on two-year debt rose by 2.63 percentage points—an enormous move by bond-market standards—to 16.5% as Greek bond prices tumbled.

Elsewhere in Europe, bond prices in Italy, Spain and Portugal also edged lower, giving up some of their gains since the European Central Bank announced a major bond-buying program last week. Meanwhile, German 10-year government bonds—seen as a haven in times of debt market turbulence—rose, driving the yield to 0.35%, close to a record low.

Investors worry that the country’s leadership under Prime Minister Alexis Tsipras is steering Athens toward a dangerous confrontation with Germany and other European powers that could end with the country stumbling out of the euro.

Since the victory of Greece’s leftist Syriza party in Sunday’s election, Mr. Tsipras and his supporters have maintained their defiant stance toward Europe, insisting that the burdens placed on Greece by its creditors be lifted. Mr. Tsipras insists he wants to keep Greece in the euro, but that wish has often appeared incongruous with his rejection of the strings that come attached to European financial aid.

“We are not going to continue the politics of subjugation,” Mr. Tsipras said at his first cabinet meeting. “We are coming to radically change the way that policies and the administration are conducted in this country.”

Many in Europe believed that such talk was campaign-trail bluster and that Mr. Tsipras would change tack once in office by adopting a more conciliatory tone toward Europe. So far, there has been no sign he will.

In Berlin, officials have reacted with a mixture of incredulity and fear to Mr. Tsipras’s initial steps.

Instead of extending an olive branch, as they expected, the Greek leader has appeared intent on antagonizing Germany. His choice of coalition partner, the right-wing Independent Greeks, are known for their anti-German rhetoric and have been particularly scathing toward Chancellor Angela Merkel .

After being sworn in as prime minister, Mr. Tsipras, who has repeatedly called on Germany to pay billions in war reparations to Greece, visited a site where the Nazis executed Greek partisans during World War II.

During the campaign, Mr. Tsipras and his Syriza party promised voters they would undo many of the unpopular policies and spending cuts mandated by Greece’s creditors in recent years. The austerity has pushed Greek unemployment to about 25% and left many in the country living below or near the poverty line.

To relieve some of that pain, Syriza says it will raise the minimum wage, some pensions and boost aid for the poor. The government said the plan would cost about €12 billion ($13.5 billion), money it believes it can raise by reallocating budget funds and cracking down on illegal gasoline sales.

Many officials in Europe’s capitals question Syriza’s math and warn that the country risks undoing much of the progress it has made in retooling its economy in recent years. Though Greece’s economy remains weak, it has hit bottom and proponents of the austerity course believe the measures have put the country on course to achieve more sustainable growth in the years ahead.

Mr. Tsipras said on Wednesday that his government’s first priority was to improve the economy, adding that he wanted to find a “viable solution” on Greece’s debt with its creditors.

Greece’s new finance minister, Yanis Varoufakis, a strident bailout critic, warned that negotiations with the creditors “will not be easy.”

But Europe has shown no indication that it is even willing to begin talks. For Germany and other northern countries, the issue of Greece’s debt is a long-closed chapter. They insist Greece fulfill its obligations and say they have already done enough. “The real economy hasn’t changed after the elections. The situation is still the same,” said Jyrki Katainen, a former Finnish prime minister who is now vice president for jobs and growth at the EU’s executive arm in Brussels. “I don’t expect that many changes from our part.”

Against that backdrop, it is difficult to see where the two sides will find common ground.

European officials say privately they might be willing to extend the maturity of Greece’s loans and further trim the interest rates it pays. But creditors have made similar concessions in the past, substantially reducing interest rates on the loans and pushing the repayment schedule out by decades. Repeating those steps would lift some financial pressure off of Greece in the coming years, but wouldn’t erase its massive debt burden.

The issue will come to a head in the coming weeks. Greece needs to negotiate the terms for the final tranche of its €240 billion bailout from Europe and the International Monetary Fund by the summer, when billions in debt repayments come due.

—Nektaria Stamouli contributed to this article.

Write to Matthew Karnitschnig at matthew.karnitschnig@wsj.com and Stelios Bouras at stelios.bouras@wsj.com