Eurozone to Greece: Cut a Deal or No Bailout

After the historic, defend-the-euro deal cut among European Union members last month, the question now seems to be who, if anyone, will blink first—political leaders in Greece as they impose more austerity, international lenders, or the bondholders now negotiating what their debt instruments are going to be worth.

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Greece does not have much time. It is waiting expectantly for the disbursement of a new package of bailout funds worth $168 billion (€130 billion). But international lenders and agencies—the European Central Bank, the International Monetary Fund, and the European Union—have made it quietly clear that they are not satisfied with Greek Prime Minister Lucas Papademos’s progress in implementing promised austerity measures. Without those funds, Athens will miss a €14.5 billion debt repayment that is due March 20.

It’s Greek politics, of course. Papademos has missed a budget deficit target of 9.5 percent because of overspending and under-collection of taxes—two of the nation’s primary problems. His government just renewed a standing pledge to cut 150,000 public-sector jobs by 2015, but it missed last year’s target of 30,000 by 29,000: It makes you wonder what those thousand people did to earn a pink slip.

On the positive side of the ledger, Athens seems to have made progress in renegotiating almost €200 billion in debt with hedge funds and other private bondholders. Last summer, creditors settled grumpily for a 21 percent loss on their investments; late last year that figure went to 50 percent. And, as of last week, bankers familiar with the talks say, they have tentatively agreed to a 68 percent haircut—comprised of a 50 loss on the bonds’ face value plus a lower interest rate going forward. These talks, not surprisingly, have been a bumpy ride.

The restructuring would be implemented through a swap of bonds: Greece will take back the original paper and reissue bonds on the new terms. Athens wants a deal along these lines—with all of Greece’s creditors—at least in broad outline by the time eurozone finance ministers meet on Monday. Talks went on all weekend in Athens between Papademos and his finance minister, Evangelos Venizelos, and Charles Dallara, the managing director of the Institute of International Finance, which is representing the private bondholders.

This agreement is key. Without it, the I.M.F., the E.U., and the European Central Bank say they will withhold that €130 billion.  Athens is anxiously awaiting.

It is plain that Papademos needs to be given maximum slack to get the job done. No leader of any political stripe would have an easy time cramming more austerity down the throats of an already exhausted and riled citizenry. What is at stake here is not simply a Greek default or contagion involving other troubled economies such as Italy and Portugal, obsessed as the markets are with these prospects. It is broader than that: It is Greece as a coherent society that is at stake.

Last month in Brussels, all E.U. members except for Britain agreed to accept E.U. supervisory teams when Brussels judged an economy to be in trouble. This was a big part of the pact that preserved the euro, AND Greece should have such supervision now. It would expose E.U. officials to the political squeeze Athens faces and lend credence among Greek voters to the government’s austerity plans.

One often gets the impression that, so far as core Europe is concerned, Greece’s problems are Greece’s and it should solve them by itself. That may have been so in the past, but as the E.U. transforms itself, this simply cannot stand any longer. Greece’s politics are Europe’s politics, in the end.

One footnote to the latest developments in Europe, perhaps for the comic relief department: As Athens renegotiates with its private creditors, a group of hedge funds is considering fighting the deal by suing Greece in the European Court of Human Rights. The argument is that if Greece alters the terms of its borrowing obligations, it could be taken as a violation of property rights. In Europe, property rights fall under human rights.

You wouldn’t believe it if you didn’t see it in reputable newspapers. And forget all about the commonweal. Take this as a sign of just how tough private bondholders will be as a deal is finally reached—and what cheap tricks they are not above deploying.