Loans didn't help Greece recover – but it was austerity that turned a crisis into a disaster

by Heather Stewart

Observer
October 23, 2011

The 'bailout' offered to the Greeks will have seen its economy contract 15% by the end of next year – a chilling illustration of what happens to economies starved of growth.

So Wednesday is the new Sunday: the make-or-break European summit scheduled for today will spill over into next week, with Wednesday now mooted as the final, final deadline for reaching an agreement.

Certainly, Merkel, Sarkozy and the rest won't want to face their exasperated counterparts from the US, China and Japan at the G20 meeting in Cannes in 12 days' time without being able to show that they have heeded the world's pleas for them to get their act together and, as US treasury secretary Tim Geithner put it, "take the threat of cascading default, bank runs and catastrophic risk off the table".

If they can overcome their differences, the final "comprehensive" package looks likely to have the three elements demanded by financial markets and by Geithner: a substantial debt writedown for Greece's private sector investors, many of them French and German banks; a recapitalisation of the banking sector to patch up the hole blown by the crisis; and a beefed-up European financial stability facility, the so-called "big bazooka".

That should buy some time, helping to prevent a Greek partial default setting off a domino effect in the world's financial markets that could bring Italy, Spain and even France crashing down.

More