Greece is in the same boat. Provided the country's Parliament passes the budget on Monday (NZT) a fresh infusion of rescue funds will stave off imminent catastrophe .
Yet Greece's economy won't recover until it has more debt relief. That should involve, broadly, a two-part process: first, agree on a plan to reduce debt if certain targets are met; then cut the debt in stages over the next decade.
The starting point is that Greece is still bust. This year private-sector bondholders reduced their nominal claims by more than 50 per cent. But the deal did not include the hefty holdings of Greek bonds at the European Central Bank (ECB), and it was sweetened with funds borrowed from official rescuers. For two years those rescuers had pretended Greece was solvent, and provided official loans to pay off bondholders in full.
So more than 70 per cent of the debts are now owed to "official" creditors (European Governments and the IMF), and the chances of repayment are sinking with Greece's economy.
Government forecasts now suggest the country's debt will exceed 190 per cent of GDP in 2014, 30 percentage points higher than the IMF predicted six months ago.
This debt burden cannot fall to a remotely sustainable level without additional relief.
In private, many Europeans admit this. In public, they deny it. Germany's Government is now willing to grant the Greeks more time to implement their austerity. But it will not even discuss any forgiveness of official loans.
Politically, this is understandable. Germany worries that any debt relief will reduce Greece's incentive to undertake reforms. And it would enrage German voters.
Economically, it is a disaster. As long as everybody knows Greece cannot repay its debts, the country will remain shut out of private bond markets and uncertainty about how those debts will be resolved will deter investment.
That's why Greece needs another debt-reduction deal. Its official creditors, particularly the euro zone's Governments and the ECB, should set out a plan for reducing its debt burden while sharpening its incentive to reinvigorate reforms.
One guide could be the "HIPC" initiative, the 1996 scheme under which lenders agreed to reduce the debts of the most Heavily Indebted Poor Countries if they implemented reforms to reduce poverty.
Another could be Poland, which ran up huge debts under its communist rulers; in 1991 creditors agreed to cut its debt burden if reforms were undertaken.
A bargain with Greece's official creditors could follow the same principle. A deal would be agreed now: if Greece sticks to its reforms, its official debts would be reduced, in stages, to a level where the burden was bearable and repayments feasible.
The reduction could come through cutting interest rates and extending maturities, perhaps to as much as 50 years.
There would be complications , but the effect of laying out a credible path to debt sustainability could be powerful.
Greeks could start to believe they have a way out of the crisis; investors could put money in the country with more certainty.
It could create a positive circle of confidence and growth. Without it, Greece's prospects are dire.
Budget first, then bailout
Greece's euro partners won't be able to release the country's next batch of bailout cash next week, even though the Greek Parliament narrowly backed more unpopular austerity measures on Thursday.
Germany's Finance Minister, Wolfgang Schaeuble, said the 17-country eurozone was not yet in a position to make a decision on releasing the funds.
As anticipated, the cash-strapped country still has to pass its Budget for 2013 while lawmakers in some countries, including Germany, have to authorise the release of funds.
The approval of the austerity bill, which will further cut salaries and pensions and increase taxes, was the key step towards persuading Greece's international creditors to release the next €31.5 billion ($49.3 billion) instalment of the country's vital bailout loans.
Without it, the Government has said the country will start running out of cash on November 16, paving the way to Greece's potential bankruptcy and exit from the euro.
That scenario has kept financial markets on edge for the past three years.
However, Germany has insisted Greece must first pass its 2013 Budget to create the basis on which the country's creditors can make a decision to release the new funds.
After the Budget vote, which is scheduled for tomorrow, the release of the funds still hinges on a report by the so-called troika of debt inspectors from the European Union, IMF and European Central bank which is not expected to be ready in time for the Monday meeting.
In addition, some euro countries such as Germany can give the go-ahead only after their own Parliaments have voted on it.
Though those votes are not expected to take much time, they add the prospect of further delay.
- AP
