Is Greek Exit From Euro Zone Unavoidable?

by Ian Talley

Wall Street Journal
November 9, 2012

Greece’s public debt will top 190% of gross domestic product and the only financing solution for Greece that avoids a euro zone exit and gives the debt-stricken country a sliver of economic hope is for the EU and the International Monetary Fund to slash lending rates to zero and extend the maturities on all official loans.

So says top euro zone think tank Bruegel as the country’s creditors negotiate how to finance a bailout package that prevents a Greek default.

Athens narrowly passed another round of tough economic policies this week amid riots on the streets of the capital. The IMF warns that the austerity measures required of Greece are pushing the country to a political and economic breaking point. Now the troika is arguing over how much they’re willing to give the country to fill a yawning financing gap and how to scale down the rising tsunami of debt threatening to drown the euro member.

While the IMF says it can’t continue to fund or legitimize the Greek program without a debt target close to 120%, euro members and the European Central Bank have stoutly rejected any debt restructuring or new cash for the country.

That has meant much of the discussion has so far focused on reducing the interest rates on loans, exchanging Greek bond holdings of the ECB, buying back Greek bonds or extending the maturities of official loans.

But Zsolt Darvas, a research fellow at the Brussels-based Bruegel institute, says those efforts, even if they are all implemented, won’t be enough to lower Greece’s debt profile to a level that prevents a euro exit.

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