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Bailout battle lays bare risks to Greece's sovereignty

A worker cleans red and black paint off the sign of the Bank of Greece in Athens after weekend riots.

Thanassis Stavrakis/Thanassis Stavrakis/Associated Press

After months of brinkmanship that tested the patience of negotiators and left the streets of Athens in flames, Greece was close to receiving its second bailout within two years, sparing the euro zone from the immediate – though not long-term – threat of its first sovereign default.

But as of midnight central European time, there was still no official report that a deal had been reached.

The expected €130-billion-plus ($170-billion) bailout, whose details were being hammered out by the euro zone's 17 finance ministers in Brussels Monday night, would come at a huge cost to Greece and may not work, given the dire shape of the Greek economy. The agreement would deprive the country of much of its sovereignty, in effect turning it into the colony of the wealthy euro zone countries and the International Monetary Fund, while ensuring that punishing austerity measures remain in place for years. Those measures have deepened the Greek recession, which is about to enter its fifth year.

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A confidential report prepared for the finance ministers, which was obtained by Reuters and other media outlets, said "prolonged financial support on appropriate terms by the official sector may be necessary," implying that extra bailout funds may be needed for years to keep Greece afloat.

Many economists argue that piling new loans on top of old loans in a country in deep recession only buys Greece some time before a third rescue mission will have to be launched. Harvard economist Kenneth Rogoff told a German newspaper that Greece will eventually have to "take a sabbatical from the euro" and revive the drachma, which could be devalued. "The mountain of debt in Greece is simply too big and the country is not competitive," he said. "Indeed, it's going to be very difficult to keep Greece in the euro zone."

Ahead of the meeting, which began in the mid-afternoon, central European time, various euro zone finance ministers gave optimistic appraisals of the negotiations, suggesting that the bailout agreement would not come unglued at the last minute.

Luxembourg Prime Minister Jean-Claude Juncker, who doubles up as chairman of the 17 euro zone finance ministers, known as the Eurogroup, said the deal was all but done. "I'd like to assume that we will come to a final and definitive agreement tonight," he said. "Greece has fulfilled all of the prior commitments that we asked of it."

Greek Finance Minister Evangelos Venizelos had a similar message ahead of the meeting. "We expect today the long period of uncertainty, which was in the interest of neither the Greek economy nor the euro zone as a whole, to end," he told reporters.

Later Monday evening, however, the tone turned darker, no doubt triggered by the tough talk from Dutch Finance Minister Jan Kees de Jager, who called for the troika – shorthand for the European Commission, the IMF and the European Central Bank – to set up shop in Athens to oversee budget controls. "When you look at the derailments in Greece, which have occurred several times now, it's probably necessary that there's some kind of permanent presence of the troika in Athens," he told reporters.

Even though the country effectively is already a ward of the troika, whose loans are keeping the government in operation and its banks afloat, disappearing sovereignty had gripped the nation and enflamed passions. Some Greek newspapers have depicted German Chancellor Angela Merkel as a Nazi officer and German flags were burned in anti-austerity protests.

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Last week, German Finance Minister Wolfgang Schaeuble, who has expressed grave doubts that Greece can meet its austerity commitments, went so far as to suggest that Greece postpone its spring elections to ensure that the technical government of Prime Minister Lucas Papademos remain in place. His worry, apparently, is that a new government would dilute the austerity measures, which the Greek people blame for soaring unemployment and collapsing economic growth.

Reports that Athens wants private holders (mostly banks) of Greek sovereign debt to take a greater "haircut" than planned added to the tensions Monday night. The debt-crunching exercise would see the investors swap about €200-billion of clapped-out Greek bonds for new bonds worth half as much, or even less if Athens got its way.

If the debt-reduction exercise succeeds, Greece would shed about €100-billion of debt. The cut, however, would still leave Greece saddled with a debt load of about 129 per cent of gross domestic product by 2020. On Monday night, Reuters said the confidential report prepared for the ministers concluded that Greece would need extra relief if it is to reduce its debt to the official target of 120 per cent of GDP by 2020. Some relief could come if the ECB were to relinquish any profits it makes on its Greek bond holdings.

If Greece does not follow through on its austerity programs and economic reforms, its debt could hit 160 per cent of GDP by that date (the euro zone average is 80 per cent). "Given the risk, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it," the report said.

Most economists think even the 120 per cent level, which would be the same as Italy's, is unsustainable, given the dire state of the economy.

Some economists and strategists are convinced that much of the German government, if not Ms. Merkel herself, would welcome a Greek default, partly to discourage Ireland and Portugal, the two other bailed-out countries, from demanding a similar debt-crunching exercise. "The German plan now seems to implement assisted suicide for Greece, so that there's no risk that the other countries follow down the route asking for debt relief," said strategist Marshall Auerback, a director of Toronto's Pinetree Capital.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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