Europe at the Brink

Time is running out for salvaging Greece and, beyond it, Europe’s shared currency, the euro. Thursday’s emergency summit meeting looms as a Lehman Brothers moment.


If Europe’s leaders fail to extricate Greece from its current unsustainable debt-servicing obligations — by lowering interest rates and lengthening maturities at a minimum — the market reaction, for all of Europe, may be unforgiving, and uncontainable as investors conclude that no European sovereign debt is safe from possible default.


Had Europe faced up to the Greek problem a year and a half ago, the crisis would likely be more contained and manageable today. It should have reached a broad pact with Athens by trading growth-promoting reforms for long-term financial guarantees and relief.


But that would have meant telling taxpayers in Germany and other northern European countries that they might have to finance some of the bailout and recovery costs (as they will end up doing anyway). And it would have meant acknowledging that heavily exposed German and French banks might have to be recapitalized at taxpayer expense.


Instead, European Union leaders imposed on Greece harsh austerity conditions that suffocated growth. They lent just enough money so it could keep paying creditors, while the ratio of its debt to gross domestic product soared.


With lower rates, longer maturities and the promise of long-term support from European institutions, Greece might have a fighting chance, or at least enough time for a negotiated solution with its creditors.


Chancellor Angela Merkel of Germany says bank creditors must first agree to a partial write-down of their loans to Greece. That would certainly be fair. But there’s no time for that fight right now. Her demands are pushing private lenders to the exits, driving market interest rates even higher and blocking any resolution.


France’s president, Nicolas Sarkozy, has argued for swapping some of the Greek debt held by French banks for longer maturities. That offers some relief to the French banks but none to Greece, and rating agencies would likely label it partial default. Neither route addresses the fundamental problem that Greece cannot pay without lower interest rates and faster growth.


The first, and perhaps immediate, consequence of a failed summit meeting could be a disorderly and destructive Greek default. The shock waves could spread to Ireland and Portugal as lenders conclude that if Greece can default despite European Union bailout programs, so could those countries.


Spain and Italy could also be drawn in. They are large, solvent economies threatened by liquidity crunches if their interest costs keep rising. But credit markets, seeing Europe paralyzed, have started to back away from these two as well. The European Union can afford a sustainable bailout of all three smaller economies. It would be far more costly to have to rescue the two larger ones.


What matters is that the relief Europe chooses results in a lower debt-servicing burden with longer payback periods and greater chance for growth for Greece and the other heavily indebted economies. Europe as a whole can raise money at much lower interest rates, and those funds can be used to restructure and refinance Greek debt.


No such solution is possible unless Chancellor Merkel steps back from her unrealistic insistence that Greece’s bank creditors first bear some of the cost of any debt restructuring. German taxpayers, and all of Europe, must be told that everyone will pay a disastrously high price if Greece is allowed to go under. Europe’s leaders need to make hard choices. And they need to make them now.




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