x Abu Dhabi, UAESaturday 22 July 2017

Good money follows bad in Greek bailout

The latest Greek bailout will not address the underlying problems of that country's economy. One way or another, a partial default is the only realistic alternative.

The world's bankers and finance ministers welcomed the Greek parliament's passage of new austerity measures yesterday. But the people whose lives will become more austere were less enthusiastic, staging a two-day general strike across the country. In central Athens thousands rioted; 66 policemen and 99 protesters were reportedly injured.

The next problem for Prime Minister George Papandreou and his government - and for the world - is that this $40 billion (Dh147 billion) in tax increases and spending cuts through 2015 will not even begin to solve the problem. Greece's debts, which total 155 per cent of the country's total annual economic output, are still rising, while the total output shrinks.

Each time new cuts are demanded, Greeks will resist more fiercely, and parliamentary votes will be closer. Unfortunately it is not pessimism but rather realism to conclude that the only real solution is a partial default. This can be disguised - "euphemism" is after all a word of Greek origin - as "restructuring" or "reprofiling" or "maturity extension" but whatever you call it, Greece's creditors will have to accept some losses.

The consequences will transcend borders. But German and French banks and governments, and economic and financial decision-makers everywhere, need to remember the old maxim: when you're in a hole, stop digging. More loans to Greece are no solution.

Will partial default increase the probability of contagion? That is, will voters in Portugal, Ireland, or even Spain decide that they, too, should push their governments to default rather than keep tightening the vice? Possibly. But orderly defaults, if necessary, are vastly preferable to an ever-deepening spiral of bailouts and, eventually, sudden defaults triggered by some unpredictable political or financial event.

Europe's politicians think in terms of their next elections, but these problems - Greece, banks' exposure, the future of the euro, austerity measures, all of it - grow worse, not better, each time a real solution is timidly deferred. Nobody gains from still more temporising, except perhaps those politicians who hope to be safely retired before their house of cards collapses.

Is it too much to expect that those same politicians will summon the vision to begin the necessary surgery before the patient gets even sicker? We hope not.