by Geoffrey T. Smith
Wall Street Journal
May 19, 2011
What's €26.7 billion ($38 billion) between friends?
The question is not as flippant as it sounds. The amount in question is what Greece was supposed to borrow from financial markets in 2012, having regained their trust through a strict and thorough fiscal adjustment program.
Barring a miracle turnaround in financial markets, that isn't going to happen. To resume medium- and long-term borrowing, Greece needs an interest rate that will allow its overall debt burden to fall over time as its economy starts to grow again, not the 16%-plus that the market is demanding.
So that €26.7 billion will in all likelihood have to be filled by more public loans—from the EU and International Monetary Fund—if the program is not to unravel in a messy, Lehman-like way. The temptation to see this as throwing good money after bad is almost irresistible, but resist it Europe must. Even if extra loans have to be extended, Europe has to keep supporting Greece until reforms in Ireland, Portugal and Spain have had time to show beneficial results. And even if, as is quite possible, the extension of more loans doesn't in the end prevent a Greek national bankruptcy, they will at least have bought another year for banks to raise capital, retain earnings and make provisions against those losses, which should all soften the blow, if and when it finally comes.
That procrastination strategy, conscious or unconscious, has served Europe well. The economic losses from bailing out Greece, Ireland and Portugal have been far less than would have been caused by a disorderly default. However, the burden of the rescue has been borne exclusively by the official sector, ie, ultimately, the taxpayer. It is time to shift some of that load back to private creditors.
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