Despite staggering costs of delay, new Greek plan offers no guarantees

In familiar after-midnight fashion, European leaders early Tuesday announced a plan to stabilize Greece’s spiraling debt and trumpeted a “new paradigm” in the country’s struggle to stay in the euro zone.

As analysts parsed the details, however, it seemed less a breakthrough than more of the same: a political compromise that will keep the country afloat for the time being but leave the ultimate success of its rescue program in doubt and threaten to cost the euro region and possibly the world even more in the long run.

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The International Monetary Fund, a party to the talks and a key creditor of Greece, said afterward that it will withhold any further bailout loans to the country until it becomes clear whether parts of the new program work as expected — a sign of the tensions among Greece’s creditors that have made a durable solution so difficult to reach. Along with the IMF, Greece’s bailout is overseen by the European Central Bank and a committee of Greece’s euro-zone neighbors — a triumvirate whose priorities have often been in conflict.

“We need to understand exactly what is delivered” under some of the more complex elements of the program, particularly a proposed Greek debt buyback, before committing to any further lending, IMF Managing Director Christine Lagarde said at an ­early-morning news conference in Brussels after the announcement of the agreement.

Three years since Greece’s debt troubles became apparent, the economic turmoil that it helped spawn remains a drag on the world economy, and the costs to Europe have far outstripped the country’s roughly $250 billion in annual economic output. Although the euro zone’s problems involve much more than just Greece’s heavy borrowing, the region’s inability to move quickly and convincingly to help the Mediterranean nation three years ago made some of those other problems apparent, upped the costs of fixing them, and arguably laid the seeds for a much broader crisis.

The European Central Bank has since pumped about $1.2 trillion into stabilizing European banks with long-term loans and purchased an additional $240 billion in bonds of troubled nations. Euro-zone countries have had to commit $700 billion to a rescue fund that has helped underwrite bailouts in Greece, Ireland and Portugal and of the Spanish banking system.

The onset of a new recession has cost the region perhaps $1 trillion in lost output, according to IMF estimates. As of November, the German central bank was owed about $850 billion by the central banks of other euro nations.

Even as European officials hailed the latest plan for Greece, others warned of the continued drag Europe poses to the world and criticized euro-zone leaders for their inability to fix the country at the epicenter of the crisis. While intent on keeping Greece in the euro zone, leaders such as Germany’s Angela Merkel have also been loath to give the country too much too fast — for fear that it would be politically damaging at home and create a “moral hazard” by seeming to reward the country’s mismanagement.

But there has been a price for the delays. The Organization for Economic Cooperation and Development on Tuesday said it projects that the euro area as a whole will remain in recession through 2013 and said Greece’s economy will continue contracting for perhaps two more years, for a devastating six-year free fall. The OECD traced the euro region’s troubles to “faltering confidence” in its ability to keep the currency union together and restore growth.

“Europe’s authorities have consistently underestimated the contagion impact of their ad hoc approaches,” William R. Rhodes, a former top Citibank executive and key negotiator during the Latin American debt crisis in the 1980s, wrote in the Financial Times as the euro plan was unveiled. European leaders and the IMF “can tinker with the interest rates and maturities on Greece’s debts, but . . . the situation is unsustainable.”

The program to stabilize Greece’s debts avoided any outright reduction in the amount of money the country owes — the strategy considered the most persuasive and the quickest way to make a debtor nation’s situation more stable. Most of Greece’s debts rest with other European nations, the ECB, the IMF and the euro zone’s new central bailout fund — institutions either politically or legally constrained from accepting losses.

Instead, to plug an estimated $40 billion hole in Greece’s current bailout program, the creditors cobbled together a potpourri of concessions: interest rates on existing loans to Greece will be lowered by a full percentage point; payments will be deferred for a decade; loan maturities will be extended from 15 years to 30; and profits that the ECB is projected to earn on current holdings of Greek bonds, bought at a steep discount in an earlier attempt to help the country, will be rebated to the country when those bonds mature.

Those and other steps offer “a better future for the Greek people and for the euro area as a whole . . . a new paradigm of steadfast reform momentum, declining debt ratios and a return to growth,” said Jean Claude Juncker, head of the group of 17 euro-zone finance ministers that negotiated the package with the ECB and the IMF.

But as with other versions of Greece’s bailout program, this one could fall off track if the economy contracts faster than expected — considered a high probability by some analysts — or if political problems in Greece prevent promised economic reforms.

The IMF wasn’t the only participant hedging its bets. Although euro-zone officials said they are prepared next month to pay out perhaps $44 billion in new loans to Greece, they said an additional $11 billion slated for the country would only be parceled out a bit at a time, next year, if the country sticks to its promises.

 
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