The Greek government on Jan. 14 announced its three-year plan to cut its budget deficit. The plan calls for spending cuts that would reduce its deficit — currently 12.7 percent of gross domestic product (GDP) — to 2.8 percent of GDP by 2012. Greek Prime Minister George Papandreou said the government is prepared to do "whatever it takes" to cut the deficit, which it is obliged to do under EU rules, and that Greece "will not retreat, we will proceed quickly." Immediately following the budget announcement in Greece, European Central Bank (ECB) President Jean-Claude Trichet said that the bank would not "change [its] collateral policy for the sake of any country." The ECB allows private banks to raise funds by using government bonds as collateral, and normally the bonds are eligible as collateral if they are rated at or above the threshold of A-. In response to the ongoing financial crisis, the ECB lowered the threshold to BBB-, but only until the end of 2010, when it will revert back to A-. With Greece (whose long-term credit rating is currently BBB+) facing successive credit rating downgrades in December, Athens is closely approaching a level where its bonds may no longer be usable as collateral, and it is also approaching the time when the lower thresholds will expire. If Greece's bonds were no longer eligible as collateral at the ECB, it would severely dampen the demand for Athens' government debt and thus greatly increase the cost of refinancing and raising new debt. This is the worst-case scenario for Athens, one that it has to avoid by preventing further downgrades — which is possible only by putting forth a credible spending-cuts plan. However, the economic crisis in Greece has put the government in the difficult position of having to juggle public debt and a mounting budget deficit. The proposed plan is optimistic, foreseeing a revenue increase amid a forecast 0.3 percent decline in GDP in 2010 and growth of only 1-2 percent in 2011-2012. This brings into question Athens' ability to raise the funds needed to cut the deficit, and raises questions about the effects of the Greek crisis on the rest of the eurozone. The Greek proposal is likely to face the same skepticism from the European Union that Athens faced in its previous attempts to reassure investors and Brussels that it can manage the crisis and consolidate its public finances. The latest plan envisions increasing government revenue by nearly 4 billion euros ($5.8 billion) by a combination of selling unspecified government-owned assets and cracking down on tax dodgers. The European Union likely will not be satisfied with a plan that depends on Athens' ability to find investors for unspecified assets, especially in the current financial climate where pricing some assets remains difficult (there is no way to gauge their worth). Furthermore, Athens has called for a crackdown on tax dodgers for years, and it is unknown how effective such an effort would be in Athens' attempts to raise revenue. The European Union might force Greece to come up with a new plan in mid-February, when the EU finance ministers will meet to discuss the proposed Greek budget cuts. Ultimately, Trichet's comments that no country will receive special treatment could just be a bluff to scare Athens into getting serious. When push comes to shove, the ECB could decide to let banks use Greek government bonds as collateral even after another downgrade, but at a slightly higher interest rate. For now, however, the ECB is talking tough and Greece has no choice but to take it seriously. Greece is therefore caught between EU demands for fiscal prudence, public demands for continued costly social benefits, investors' questions about Athens' ability to repay its debt and a closing window of opportunity to reconcile its finances. The government is therefore trying to balance divergent obligations, enacting austerity measures that will satisfy the European Union and reassure investors but exacerbate social tensions. This makes the budget proposal just the latest in a line of dire economy-related developments — including violence targeting government and business infrastructure — in Greece during the past few weeks:

• Dec. 8-22: Credit ratings firms issue a series of downgrades and warnings concerning Greece. Fitch Ratings downgrades Greece's credit rating from A- to BBB+, citing the rising budget deficit. Standard & Poor's then downgrades Greek credit from BBB+ to AAA-, and Moody's downgrades it from A1 to A2.
• Dec. 24: The Greek parliament passes a budget calling for spending cuts, and unions respond with calls to strike. The plan proposes raising taxes on the rich and cracking down on tax dodgers, but does not go into specifics of how the budget deficit is supposed to be tackled.
• Dec. 27: An improvised explosive device detonates in central Athens near the entrance to the National Insurance Company offices.
• Jan. 4: Greek government officials say that they cannot submit the details of their budget deficit reduction plan in early January as promised and will have to do it later in the month.
• Jan. 6-8: A European Commission auditing team visits Greece to give Athens recommendations for handling the financial crisis. The recommendations, which are criticized by several Greek government officials, include reducing public sector wages, reducing pensions up to 7 percent, eliminating early retirement and adopting a more flexible labor market.
• Jan. 9: An improvised explosive device detonates outside the Greek parliament building.
• Jan. 12: The European Commission brings into question economic statistics provided to it by Athens, saying that it has found severe irregularities that may justify legal action against Greece. Competent statistical reporting is a treaty obligation for EU member states.
• Jan. 12: Greece auctions 1.6 billion euros ($2.3 billion) worth of bonds at a yield of 2.2 percent, 129 basis points higher than its previous auction in October 2009, illustrating that investors are asking a high premium for Athens' government debt.
• Jan. 12-13: Greek officials launch a major campaign to reassure investors and EU members that Greece is not in dire straits, telling media that Greece does not need a bailout and that there is no way Greece will leave the euro or seek assistance from the International Monetary Fund (IMF). At the same time, IMF experts begin a weeklong mission to Greece to advise the government on managing public finances.
• Jan. 13: The ECB sharply criticizes a Greek draft law on refinancing individual and corporate debt. The law would allow businesses and individuals to deduct compound and default interest from the debt and would call for the deletion of credit history for customers who agree to refinance outstanding debts.
• Jan. 13: Credit rating agency Moody's states that Greece could experience a "slow death" and that the Greeks face "downward ratings pressure now that they must implement politically difficult fiscal retrenchment" in order to halt a "decline in their debt metrics."
• Jan. 13: German Chancellor Angela Merkel pressures Greece by stating, "The Greek example can put us under great, great pressures. Who will tell the Greek parliament to please go ahead and pass a pension reform? I don't know that they'll be enthusiastic about Germany giving them instructions."
• Jan. 14: The Greek government proposes a budget deficit plan. In response, state workers' unions announce a strike to take place on Feb. 10 to protest the austerity measures.
• Jan. 14: ECB President Jean-Claude Trichet says talk of Greece quitting the eurozone is "absurd" but notes that the ECB would not "change [its] collateral policy for the sake of any particular country."