The Greek conundrum
The Greek crisis stumbles on. It defies solution. Meetings - like the current European finance ministers' gathering - come and go. Statements are made. The truth is shaded. Indecision wins. The ministers play for time which they might not have.
The markets ask what they are going to do with Greece and there is no convincing answer.
Greece agreed to meet targets to bring down its deficit. The target for this year was 7.6%. It won't be met. The country will struggle to reduce the deficit to 8.8%.
There are several reasons but the main one is recession. The Greek economy has shrunk by 12.5% in three years. It will contract again next year. Tax revenues are falling and so the deficit remains stubbornly high. Spending cuts and tax increases, which were demanded in exchange for the first bailout, have only contributed to a cycle of decline.
In reality, the Greeks should be denied further funding until they live up to their commitments. But Athens says it will run out of money in a few weeks without extra funding.
Finance ministers, meeting in Luxembourg, have applied a gentle squeeze by saying that the next instalment of 8bn euros ($6.8bn) won't now be made until November.
'Greece won't fail'
Everyone knows, however, they will pay. The Greeks have no doubt about it. They sense their creditors at the EU and the IMF have a weak hand. However frustrated they are with Greek promises, they fear default more.
As the head of the Eurogroup, Jean-Claude Juncker, said "we had no one advocating a default for Greece. Everything will be done to avoid that and it will be avoided".
A few days ago, President Nicolas Sarkozy of France was equally unequivocal. "The failure of Greece," he said, "would be the failure of all Europe... it is not possible to let Greece fail, for moral and economic reasons".
So the fudge machine is being fired up. What cannot be achieved in 2011 will be pushed into 2012. New measures are certainly needed but not until 2013 and 2014.
For Europe's leaders, a Greek default is the unknown; a sequence of events that they can only guess at. What they fear is that it will lead to a new banking crisis and that instability will spread to more "important" countries like Spain and Italy.
Privately, these same leaders agree that some kind of default is inescapable. If there is a plan it is to play for time, to strengthen Europe's banks and to erect a firewall around Greece if and when it defaults. So there is much talk of banks needing fresh capital.
There is, however, another reality that they have less control over - and that is Greece itself. It edges ever closer to outright resistance to the austerity packages. The government is no longer certain it can deliver. It has a four-seat majority but it is fragile.
Some of the ministers are living in fear, and are under intense stress. When Finance Minister Evangelos Venizelos recently went to a hotel on the outskirts of Athens to address a conference, his security official would not open the door of his bullet-proof BMW until they had checked for potential attackers. Some MPs are almost in hiding, such is the anger on the streets.
The signs of a society disintegrating are everywhere. They are there at the vegetable markets, where even the middle class can be seen scampering after the damaged fruit when the market closes.
The suicide rate is soaring.
Middle-class parents cannot afford treats for their children. All over the city are young men pushing supermarket trolleys going through the garbage looking for strips of metal they can trade. At a recent flea market I watched and spoke to Greeks picking through piles of cheap clothing.
It is impossible to know when a society has reached a breaking point until it happens. But Athens seems sullen, angry, resentful and on edge. My instinct is that Greeks reluctantly will agree to the new measures because they see no alternative - but it could be that the people decide the future for themselves by refusing to accept any further cuts. It might happen.
There is a strong case for the government cracking down on tax evasion and a bloated public sector. Almost nowhere else has state jobs guaranteed for life. But few Greeks see how the current strategy of austerity without growth can work.
Who takes the hit?
The government has made progress in reducing the primary deficit. Next year it aims to achieve a primary surplus - ie a budget surplus, excluding the costs it pays to service its debts. But salaries are being reduced, jobs cut and the economy is shrinking. So revenue is down and so the debt burden moves higher. Next year it will have reached 172% of GDP. This is a country that again, next year, will see no growth.
And, even if it achieves a primary surplus, there is still 371bn euros of debt to service. Sony Kapoor of the economic think tank Re-Define says that: "Greece is now struck in a downward spiral, the only sensible way out of which is to reduce the stock of debt through a haircut to bondholders."
Under the current bailout plan, private investors - like banks and insurance companies - agreed to accept losses of about 21%. That is no longer seen as sufficient. Already the figure spoken of is closer to 50%. So the 21 July deal is on the verge of being re-opened before it has even been adopted, and some private investors may refuse to accept larger losses. That, in itself, could hasten a default.
Somehow, Greek debt will have to be reduced by as much as 180bn euros in order for the country to have a reasonable chance to escape its crisis. Who will take that hit? Will it be the banks? Will it be the EU's main bail-out fund? Will it be taxpayers?
Ministers and officials are still examining how they can increase the size of the main bailout fund, the EFSF, without increasing the risk to taxpayers. The Germans have already ruled that out. A few weeks ago the option of boosting the bailout fund to two or three trillion cheered the markets - but already that idea is mired in difficulty.
So, the Greek conundrum. Almost no-one believes the current strategy is working. The markets shiver. They do not see a convincing plan for Greece. But leaders and officials find that at every turn are risks and so the preferred option is to buy time. What they fear most is a disorderly default, and that instils caution.