Greek bailout wards off disaster _ for now

Associated Press Modified: February 21, 2012 at 1:16 pm •  Published: February 21, 2012
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BRUSSELS (AP) — A second, €130 billion ($172 billion) bailout and a deep debt write-off for financially stricken Greece will ward off a financial disaster in Europe.

Economists, however, only give the deal a slim chance of putting the country on the path to economic recovery — and steadying its place in Europe's currency union.

Agreement on the bailout, reached early Tuesday after an all-night summit of finance ministers seven months after it was first proposed, will give Greece €130 billion in loans through 2014 from other eurozone governments and the International Monetary Fund. It's the country's second bailout, following a €110 billion rescue secured in 2010 that didn't return the country to solvency.

The agreement also assumes that banks and investors owed money by Greece will take new bonds that reduce their holdings by more than half.

In return for the second bailout, Greece has agreed to painful and humiliating measures imposed by its mistrustful partners which also use the euro, annoyed after two years of what they say are broken promises to reform. Athens agreed to cut spending and wages, and to permit outsiders to supervise its finances through the presence of European Union and International Monetary Fund officials permanently stationed in Greece. The rescuers also demanded a separate account for the aid money and legal guarantees that creditors get paid before teachers, doctors and police do.

The finance ministers from Greece and the other 16 countries that use the euro wrangled until the early morning over the details of the rescue, squeezing last-minute concessions out of private holders of Greek debt who agreed to lose 53.5 percent of the face value of their investment to avoid even more severe losses expected if Greece fails to pay €14.5 billion in debt coming due March 20.

The fear is that an uncontrolled bankruptcy could unleash market panic across the rest of the continent, further unsettling other struggling other debt-stricken countries such as Ireland, Portugal or the much bigger Italy or Spain.

Serious risks of failure include the chance that Greece's economy remains in a deep recession — where it's been for four straight years — instead of returning to growth in 2013 as the deal assumes. That would undermine chances of paying even the reduced debt load, estimated at a still-high 120 percent of annual economic output in 2020, down from 160 percent now.

Additionally, political outrage over the cutbacks could lead Greece politicians to balk at the tough conditions. That could push rescuer countries — led by Germany — to cut off further funding.

Elections in Greece are expected in April. The leaders of the two main parties have committed to the cuts and reform program, but anti-bailout parties have been gaining in the polls.

Growth is the key. But Greece's economy shrank 7 percent in the fourth quarter of last year and unemployment is 19 percent, a consequence of cuts in public wages and increased taxes inflicted during a downturn.

If that keeps up, even the rescuers acknowledge the reduction goal of 120 percent of GDP is long gone.

Success "really depends on the assumptions you make in terms of growth and interest rates," said Diego Iscaro, an economist at IHS Global Insight. "The risks are clearly on the downside. The main risk comes from the economic situation, the economic dire straits."

"By austerity alone, Greece will not solve the problems it has at the moment. We don't know when the economy will return to growth and how it will grow."

Unless something breaks the cycle of austerity and contraction "something will have to give."

Even if it later balks at the conditions for the bailout, Greece would have difficulty writing down the new debt it issued to private bondholders, who demanded stronger legal protections. Official creditors — the IMF, the eurozone countries and the European Central Bank — would also have difficulty accepting more writedowns. Inability to pay — or unwillingness to accept the harsh conditions — could lead to a non-negotiated "hard" default that could end in Greece leaving the euro.

The eurozone and the International Monetary Fund hope the new program will eventually put Greece back into a position where it can survive without external support. Both private and official creditors went beyond what they had said was possible in the past. On top of the new rescue loans, Athens will also ask banks and other investment funds to forgive it some €107 billion ($142 billion) in debt, while the European Central Bank and national central banks in the eurozone will forgo profits on their holdings.

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