Eurozone still in denial about Greece

Robert Peston
Economics editor

image copyrightSAKIS MITROLIDIS

There is something wonderfully mad about the idea that if Greece's creditors can agree on a bailout, which they have done, that represents important progress.

Because, as won't have escaped your notice, the biggest problem all along has been that the youngish Syriza government of the debtor, Greece itself, hates the conditions imposed by the creditors for the mooted rescue.

The fundamental disagreement between Greece and its lenders - eurozone nations, the European Central Bank and the International Monetary Fund - is over the degree of further austerity to which Greece must commit in order to receive 7.2bn euros of additional credit.

But although for the pride of the creditors, the question of whether Greece is obliged to generate a surplus on its budget, excluding interest payments, of a bit more than zero or 3%, feels like a world of difference - it is a rounding error compared with the money Greece owes them, which is equivalent to 180% of Greek GDP.

In the highly unlikely event that Greece could generate a 2% or 3% surplus year-in and year-out without its economy shrinking further (which few economists would anticipate), it would take around half a century for Greek public sector debt to fall to a level regarded as sustainable.

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A half century of austerity? In what modern democracy would that be regarded as a realistic option?

So all these fraught talks about a release of the last 7.2bn of cash from the current rescue facility can probably be seen as displacement activity.

And if there is agreement in the next day or so on a framework to release that cash, this should be seen as no more than a short-term temporary fix.

The hard talks are yet to come.

The point is that Greece desperately needs those few billions of euros to pay its maturing debts to... the IMF and the European Central Bank.

With 300m due to the IMF on Friday, and a further 1.3bn euros later this month, this has always been a row about book-keeping entries and the accounting treatment of debts.

It is a dispute about whether the eurozone's creditors will release funds so that they can pay themselves and avoid having to call Greece in default.

Or to put it another way, it is all about whether the IMF and eurozone can keep up the pretence that Greece is a sound and solvent debtor.

But doesn't it normally tell you something pretty important about those who owe you money when you have to lend to them so that they can keep up the payments to you?

History suggests that at some point the IMF, ECB and eurozone will have to recognise that Greece's 320bn euros of sovereign debts is a lot of spilled milk that will have to be cleaned up.

Whatever the human temptation to say to the Greeks they shouldn't have borrowed the money and have to pay it back, it also defies precedent to argue that a country with such a relatively small and weak private sector will ever have the capacity to pay it back.

Which implies that the only rational conversation for Greece's creditors to have with Greece is the one they refuse to have - which is on the scale of a write-off necessary to take the country off an inevitable road to dangerous penury.

So even if Greece and its creditors do achieve some kind of pact that allows it to meet its immediate bills, all that would mean is that the big conversation - about whether Greek debts need to be forgiven - has been deferred.