The Biggest Obstacle to a Greek Bailout May Be Greece

Stock markets around the world got hammered on Tuesday after the latest and perhaps thorniest obstacle yet emerged in Greece's debt saga. And that would be vicious opposition to a bailout package thrown together at the last minute by Greek citizens.

After months of dithering, European leaders hustled to propose a 110 billion euro aid package for the beleaguered Mediterranean country over the weekend following chaos in European financial markets. The austerity measures the package entails, though, have been met with loud revolts in Greece. Labor unions seized landmarks like the Acropolis on Tuesday as part of a growing wave of strikes set to unfold during the week.

Stock markets in heavily indebted Spain and Portugal were among the hardest hit. Investors see Greece as a test case for other troubled European economies, and the chaos currently underway is unnerving.

Thanks for Nothing

Tensions in Europe are now at an impasse. Powerhouses like Germany that have been prudent with their finances detest having to bailout their profligate neighbors. And with German elections less than a week away, incumbent politicians are under further pressure to appear tough.

And yet the Greeks are anything but grateful for the bailout. Only 14.8% of respondents in a recent poll expressed relief or hope at the prospects of a rescue. Those expressing anger, disappointment or fear came in at about 31%, and about 23% responded with shame.

The austerity measures that accompany the bailout are particularly loathsome to the Greeks. Prime Minister George Papandreou outlined belt-tightening measures like freezes in public sector salaries, pension cuts and higher sales taxes as part of a plan to garner about 30 billion euros over the next three years in order to land the loans.

But 51% of Greeks said they would reject the austerity measures according to a separate recent poll, with only 33% saying they would agree to the terms.

Scrambling to Help

Even as Greek balks, the rest of Europe is scrambling to become more accommodative as the prospects rise sharply of a major economic crisis that seriously threatens the euro's viability. Deutsche Bank CEO Josef Ackerman said his firm would keep credit lines open to Greek banks and prop up sovereign debt in a bid for public support. And French lawmakers swiftly approved the release of funds for a Greek bailout.

The moves follow a sharp about-face by European Central Bank President Jean-Claude Trichet, who said the bank would continue to indefinitely accept Greek bonds as collateral despite their downgrades by ratings agencies.

Spanish Prime Minister Jose Luis Rodriguez Zapatero rushed to quash rumors that the country was seeking a 280 billion euro of its own by calling it "madness."

There Goes the Euro?

After months of European political posturing aimed at domestic voters, the region's sovereign debt crisis has reached a tipping point. Under the best-case scenario, Spain and Portugal might see the havoc unfolding next door and move dramatically to avoid it. In that event, investor anxiety about contagion might be overdone.

But the opposite lesson could be learned as well. Politicians in Spain and Portugal might become emboldened as European powers cave in to tiny Greece because of the systemic risk it poses. A breakup of the euro, as outlandish as it seemed just months ago, would then be a distinct possibility. And that would pose a much bigger risk for investors than anything that has unfolded so far.