Kicking The Greek Can

By RICHARD BARLEY

If the Greek can is to be kicked down the road, it had better be a big kick. The original €110 billion ($159.40 billion) bailout was flawed because it assumed Greece would return to the market in 2012 to issue between €25 billion and €30 billion of bonds. Once it became clear that a major funding gap was looming, a fresh crisis was triggered. The last thing the euro zone needs is a repeat of this problem next spring. Time is a valuable thing to buy.
The risk is that whatever solution is stitched up this month will only provide Greece with funding until mid-2013, when the current International Monetary Fund program is due to end and the new permanent European Stability Mechanism, under which debt restructuring is a possibility, is introduced. If so, the likelihood is that the euro zone will face another crisis in 2012, as a funding gap would again be only a year away.
What is needed is a longer, larger package. Fitch, for one pegs the funding need to the end of 2014 at between €90 billion and €100 billion. True, this would raise more political hackles. But not all of the money would come from the IMF and euro zone. Privatizations can raise cash, and a version of the Vienna Initiative—the successful effort to get banks to retain exposure to Eastern Europe in early 2009, at the height of the global financial crisis—can help involve private-sector creditors.
Funding into 2014 would have several potential benefits. First, Greece could reform; by 2014, the debt-to-GDP ratio should be falling and there should be a clear primary surplus, without which even a debt restructuring wouldn't help.
Second, it would give banks more time to prepare for a restructuring if it became necessary, reducing the need for costly bank recapitalizations by taxpayers. Third, it gives time to Spain to continue with reform and minimize contagion risks.
Lastly, it might ease bond-market fears about the ESM, another badly designed European mechanism that envisages private-sector involvement as a starting point. That could help Ireland and Portugal.
But no bailout can entirely dispel the uncertainty. Greece must convince the IMF every quarter that it is sticking to its program to receive further bailout funds. Unfortunately, that means the Greek can never be kicked that far away.