In Lifeline to Greece, a Risk for the Rescuers

VENICE — As European leaders move toward a second bailout for Greece, some economists are warning that a new rescue will simply kick the country’s problems further down the road, and may not halt an eventual default that could strain the rest of the euro monetary union.

A year after providing an aid package of €110 billion, or $161 billion at current exchange rates, that has failed to help Greece mend its tattered finances, officials are considering whether to lend the country an additional €50 billion or €60 billion to give it more breathing room while it struggles with a deep economic downturn that has made it harder to avoid a restructuring of its debt.

Even if Greece is pulled from danger again, economists say, European leaders are faced with the prospect of providing more aid over the next several years if Greece cannot swiftly overhaul its economy and stoke the necessary growth to get it off a long-term lifeline.

“I don’t see how Greece can eventually avoid some kind of default,” said Martin N. Bailey, a senior fellow at the Brookings Institution and the former chairman of the U.S. president’s Council of Economic Advisers.

“It’s hard to see how you can avoid the need to finance this over the next 5 to 10 years,” he said over the weekend at a conference held in Venice by the Council for the United States and Italy.

His sentiment was echoed widely among economists, politicians and analysts gathered here.

“We were too optimistic about the first bailout for Greece,” said Fabrizio Saccomanni, the director general of the Italian central bank.

Slow economic growth has cut a bigger hole in the Greek budget, leading to a new scramble to find more money as the country remains shut out of financial markets and grapples with one of the largest debt burdens in the world. The government is trying to cut its deficit by €6.4 billion with more spending cuts and tax increases, and raise €50 billion by selling major national assets.

Without those pledges, the International Monetary Fund was wary of releasing a new portion of aid promised in its first loan a year ago, and European leaders were loath to come up with new financing for Greece.

Experts at the conference expected a number of potential international investors — many of whom stockpiled cash after the financial crisis — to look at what Greece is putting up for sale. But the country’s ability to restore economic stability over time would be a major consideration for any deal.

That confidence may be hard to come by. The Greek fiscal crisis worsened after Moody’s Investors Service warned last week that there was a 50 percent chance that the country would default or have to restructure its debts within the next five years.

European leaders want to avoid such an event at all costs. The European Central Bank has warned that a default or restructuring may lead to problems on the order of the collapse of Lehman Brothers, by sparking a panic about the ability of Ireland and Portugal — which have also received European bailouts — to repay their debts. The result, some say, could be a new contagion that engulfs other weak euro zone countries, a number of large European banks and even the E.C.B., which holds large amounts of Greek debt.

Some officials say such warnings are too dire.

“I don’t see a crisis in the euro zone,” Mr. Saccomanni said. “If anything, Europe’s financial conditions are sounder than other economies, although there is a crisis in some euro zone countries.”

But most economists say they see any further trouble in Greece as both a political and economic flash point for the rest of the euro zone. As it is, the inability of heavily indebted countries to stoke their economies will probably broaden an economic divide between those nations and Germany.

The German economy has expanded so quickly that the E.C.B. raised interest rates in April to ward off the specter of inflation in the country, a move that analysts say will further dampen growth in Ireland, Portugal, Spain and other weakened economies.

Article source: http://www.nytimes.com/2011/06/06/business/global/06euro.html?partner=rss&emc=rss