November 27, 2012
After weeks of foot-dragging, the eurozone has stumbled towards a new aid programme for Greece. The package agreed in the early hours of Tuesday morning will not be the last. But it shows Europe is starting to accept grudgingly that there is a cost to keeping Athens in the single currency.
That Athens will, at last, receive the €34.4bn it had long been promised by its partners is welcome. After the Greek government had passed a draconian programme of fiscal consolidation requested by the eurozone, it would have been unthinkable for the rest of the bloc to refuse to fulfil its side of the bargain. The cash will also help the economy: fresh capital will ease the constraints on the country’s struggling banks.
There are also signs that the eurozone is coming to terms with what market participants have long recognised. Athens’ public debt is unsustainable and creditors – including the official sector – will have to take further hits to put it back on the right track. The International Monetary Fund deserves credit for putting its foot down and demanding a more realistic plan.
The steps taken on the path to debt-relief are, however, still questionable. Reducing the interest rate charged on bilateral loans was hardly the best place to start: it may force countries in difficulty such as Italy and Spain to lend to Greece at a loss, while Germany will still make a small profit. The maturity extensions agreed were too timid. It is doubtful whether they will give enough time for Greece to grow sufficiently to repay its debt.