News Analysis: Greece’s Urgency Challenges European Union Efforts

The 17 European Union nations that share the euro don’t have that much time, of course, to convince investors that they have a plan to hold the currency together and prevent a run on the Continent’s banks. Some analysts say they have less than five weeks, until the Group of 20 summit meeting in November; others say a bit longer.

But rapid action comes hard to a union that works in increments, with political agreement required at every step.

In the short term, Greece remains the central problem. Two bailouts have not been enough. Greek public debt continues to mount, and so does the pressure on the government to find more revenue and make more cuts. Europe’s strategy, to the extent it can be discerned, is to put off restructuring Greece’s debt as long as possible and build up enough backing for a bailout fund so that banks with large exposure to the sovereign debt of Greece and other troubled euro-zone countries, like Portugal, Ireland, Italy and Spain, can survive an all-but-inevitable Greek default.

But the austerity-driven recession in Greece has made its budget deficit even worse than experts predicted, and the country has not kept all its promises to the “troika” — the European Union, the International Monetary Fund and the European Central Bank — that is keeping Athens afloat. Experts from the troika left Greece a month ago in unofficial disgust; they returned last week only after getting fresh promises of action.

Athens is again at the brink. Without the next tranche of aid from the troika — 8 billion euros — Greece could immediately default. So the troika is playing hardball, trying to force Athens to make crucial structural changes that lenders think will never happen otherwise.

Still, the consequences of a disorderly default are considered so dire that Athens has cards to play, too. A strike by workers at the national statistics bureau has made it difficult to get up-to-date fiscal data. The government has said it faces default by mid-October without the aid, but “we think they were exaggerating deliberately to put pressure on us,” a senior European official said.

When speaking privately, officials concede that Greece’s debt, trading at only about 40 percent of its face value, is unsustainable and that lenders will probably have to write some of it off. A “haircut” of 50 percent, followed by a recapitalization of banks if necessary, is the outcome most commonly mentioned.

Germany and France are not prepared to consider doing that yet, though, in part because relieving the pressure on Greece would remove its incentive to overhaul its finances and make its economy more competitive. And if Greece gets such a deal, why shouldn’t Portugal, Ireland and the others?

Equally important, Germany and France want to delay any Greek default, orderly or not, until they have bolstered the rescue fund and taken other steps to protect Italy, the biggest economy in southern Europe.

So for now, the European Union is focused on its own struggle to ratify the bailout deal struck on July 21. It would expand the effective lending capacity of the rescue fund to 440 billion euros ($589 billion) and give the fund new powers to buy bonds on secondary markets, lend to nations and recapitalize banks.

The deal still needs ratification by Malta, the Netherlands and Slovakia. Despite doubts about even more loans to Greece, they are likely to go along, while Finland, another skeptic, still wants Greek collateral. In the meantime, the European Central Bank is buying large amounts of Spanish and Italian paper to try to keep those countries’ borrowing costs down.

In the medium term comes another challenge. There is consensus that while 440 billion euros can cover Greece, Portugal and Ireland, it will not be enough if Italy, Spain and the banks are in play. So the next debate is over how to enlarge or leverage the fund. At least five new models are under consideration, European officials say.

Jack Ewing contributed reporting from Frankfurt.

Article source: http://www.nytimes.com/2011/10/03/world/europe/greeces-urgency-challenges-european-union-efforts.html?partner=rss&emc=rss