Greece’s third bailout might run to as much as €86 billion. But to even start talks on that financing, the Greek parliament must pass reams of legislation by Wednesday, including mechanisms for semiautomatic spending cuts if the country fails to hit fiscal targets.
Only emergency bridge financing will prevent a default on the European Central Bank. Greece’s debt, however, remains a problem that hasn’t been fully addressed.
The real issue isn’t the amount of debt, even though Greece’s total debt stood at 177% of gross domestic product in 2014 and it already owes other governments, the International Monetary Fund and the European Central Bank €246 billion, according to Deutsche Bank. It is the constraints the euro places on managing debt.
Europe has ruled out face-value reductions, and even a softening of terms—longer maturities or grace periods—will have to wait until a new program is in place, under way and has undergone a positive first review.
Such measures can be significant, and Greece has already benefited from them, reducing its financing costs. But the sheer scale of Greece’s debt remains a political flash point.
There are usually several ways of attempting to fix a government debt problem, including growth, inflation, austerity, and restructuring. The most palatable is growth: ideally, a country could grow into its debt burden, making it sustainable.
Over time, economic reforms could boost Greece’s growth, and are desperately needed. But this is no quick fix; it involves unpopular political choices.
Inflation is no way out: the European Central Bank’s mandate sees to that. True, inflation dynamics vary from country to country. But for now, it may well be Germany, where government debt is already falling, that sees higher inflation.
That leaves austerity and restructuring. Austerity in small doses is bearable, but has clearly tested political limits in Europe. And restructuring is a costly option for an advanced-economy bloc.
The lesson from Greece is that while eurozone members can force losses on private-sector bondholders, they cannot do the same when it comes to loans from other governments. Indeed, the only way to do so appears to be to leave the euro and default.
An outright reduction in debt would otherwise put the eurozone on the road to a fiscal union that no government or voter has agreed to.
The euro effectively attempts to enforce ascetic virtue on debtors: they cannot devalue or inflate away the value of their debt, so instead they are forced to reform their economies.
The worry is that Greece isn’t the only highly-indebted member of the eurozone; a renewed economic downturn could prove challenging for others.
That might expose further the limitations imposed by the euro. But for now it puts the onus squarely on Greece to reform its economy, and fast.