Wednesday, June 29, 2011

Delaying the Inevitable in Greece

Wall Street Journal
June 29, 2011

Outsiders watching the euro-zone debate on Greece’s finances often have the following question: What are they thinking? The governments are expending much time and energy coming up with a new package of loans for Greece. But with total debt approaching 160% of gross domestic product and a deficit that’s one of the largest in the EU, a major debt restructuring appears unavoidable.

So why delay the inevitable?

The answer, according to a senior euro-zone official involved in the debate, is that time is a valuable commodity – not for Greece, but for Ireland and Portugal, the two other bailed out euro-zone nations. Governments have largely accepted that full repayment by Greece is impossible, the official says. What they are trying to do now is “ring fence” Greece from Ireland and Portugal.

All three countries face messy economic problems, but Greece’s mess is of a different order of magnitude: The budget books were cooked to start with, while the country’s debt was well over 100% of GDP when the first rescue program was negotiated. Greece’s current account deficit, after reaching a whopping 20.4% in 2008, is still, at nearly 12%, the highest in the euro zone.

The new aid program will likely tide Greece over until 2014. The idea is that Ireland and Portugal by then will be able to show that the programs imposed on them in exchange for getting rescue loans are working, the official says. If the programs go according to plan, both countries will have started borrowing from financial markets again.


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