Time for the Greece Rescuers to Dig Deeper—for Courage

By PAUL HANNON

Another summit, another deal, another disappointment.
The euro zone's struggle to get to grips with its fiscal crisis grinds on, each failure edging more of its members toward the threshold three have already crossed.
The initial reaction to the new funding package for Greece agreed by the 17 euro-zone leaders last week was one of relief, since any deal was considered to be better than no deal, and expectations of its substance hadn't been high.
But as the days have passed, investors have taken an increasingly jaundiced view of the agreement, so much so that the Spanish government is once again paying more than 6% to borrow for 10 years, or just below the level at which the governments of Greece, Ireland and Portugal were forced to seek help.
So, unless there is a major change in sentiment because of developments elsewhere—across the Atlantic, for example—Europe's leaders will have to interrupt their August vacations and come up with a proper plan.

The major flaws

The deal thrashed out last week has three major flaws.
First and foremost, the size of the euro zone's bailout fund hasn't been increased, and is therefore nowhere near large enough to provide funding for either the Spanish or the Italian governments, let alone both.
The main thing to remember here is that boosting the bailout fund would cost the other euro-zone governments very little up front—they are offering guarantees against which the fund can borrow. It would cost them a great deal only if a country that had been forced to borrow from the fund were unable to pay it back.
The reluctance of member governments to increase the size of the fund therefore sends two pretty damaging messages:
• first, that they think it is reasonably likely a member of the bloc won't be able to repay them; and
• second, that they aren't prepared to stand together to get through the fiscal emergency, come what may.
This has been the core problem throughout.
The euro zone has had the financial muscle to bring the crisis to an end; what it has lacked has been the political will to do so; or rather, politicians haven't believed their voters want the euro enough to be prepared to sacrifice anything for it.
Last week's agreement proves this is still the case. But the euro zone is running out of time, and the latest failure may prove fatal.
The second major flaw is that the bailout fund won't be able to exercise its new flexibility anytime soon.
Euro-zone leaders agreed that the European Financial Stability Facility and its successor should be able to agree in advance that a specific level of funding would be available to a government if it were needed; a so-called precautionary arrangement. They also agreed that the EFSF will be able to recapitalize banks, and buy government bonds in the secondary market.
It would probably help Spain and Italy if the EFSF were able to do all of this right now. But it isn't. Getting to the point where it requires the approval of euro-zone lawmakers, some of whom have already made it clear that they aren't happy.
And even once the politicians have agreed, the EFSF will have to raise the necessary funds on the international bond markets, a process that in itself will take many weeks.
So it may be months before the EFSF is actually able to exercise its newfound flexibility.
In the meantime, the European Central Bank could jump in to buy Spanish and Italian government bonds.
But, after losing the battle over private-sector involvement in the Greek bailout, it seems to be in a sulk.
The third major flaw is that the new funding program for Greece isn't going to work, largely because it is based on ludicrously optimistic targets for revenue raised through privatization, and a hoped-for reduction in the stock of debt that is nowhere near large enough.
Half of the projected privatization revenue is supposed to come from sales of real estate. But the government doesn't even know how much land it owns, and has only the vaguest idea how much that would be worth under normal circumstances, let alone during a fire sale.
Adding to its problems, the projected reduction in the amount owed by the government as a result of the proposed bond exchange and buyback will still leave it with much more debt relative to the size of its shrinking economy than any other euro-zone member.
Of course, euro-zone leaders aren't alone in lacking the courage to deal with substantial debt problems that have had a very lengthy gestation. And one has to have some sympathy for the 17 who gathered in Brussels last week—they are by no means chiefly responsible for the mess they have to clear up.
But if they want to pass something a little less tarnished on to their successors, they are going to have to be a lot more adventurous, and take bigger risks with their own careers.