From tragedy to farce

By J.R.

HAPPY endings were never much of a feature of classical Greek tragedies. Talks around a further bail-out of Greece have run the gamut of modern literary genres, taking in drama and thriller. Now they seem headed for farce.

On February 14th a meeting of finance ministers in the euro area was postponed when it became apparent that not all Greece's main political parties were willing to pledge to honour tough new conditions demanded in return for a bail-out. A day later Antonis Samaras of the New Democracy party reversed course and wrote to the European Commission and International Monetary Fund promising to implement the austerity measures if his party wins a general election in April. On the streets of Greece, meanwhile, protestors have continued to demonstrate against the planned spending cuts. Events have taken an ugly turn, with some protestors burning the German flag while some right-wing newspapers have cast Germany's chancellor, Angela Merkel, as a Nazi.

The wrangling underscores how unlikely it has become that a successful Greek bail-out can be crafted. The first reason is simply a question of timing. The country has to have a new deal in place by mid-March if it is to avoid defaulting on €14.5 billion ($19 billion) of maturing bonds. An element of that is likely to include a significant measure of debt-forgiveness by banks holding Greek government bonds.

Banks have been preparing for this by writing down their holdings. On February 15th BNP Paribas, a French bank, cut the value of its bonds by 75%. Yet Greece has yet to reach an agreement on some sort of bond-swap and, with each delay in the talks, it seems less likely that there will be enough time to complete a “voluntary” swap by the deadline. This must suggest that the risk of a default is increasing.

A deeper problem facing Greece is the deterioration of its economy. Even with significant debt forgiveness by banks, and some reduction in the amount it owes official creditors such as the European Central Bank, which has bought Greek bonds at a discount, the country will be left with a debt burden it is unable to bear. That too tilts the balance towards a default at some point.

Amid this uncertainty the euro has again slipped against major currencies. There are, however, encouraging signs that a Greek default may prove less damaging to the rest of Europe than previously feared. Countries such as Italy have held successful bond auctions and the funding pressures facing banks have abated. “People are fairly relaxed that one way or another the Greek situation will be resolved,” says the boss of a large European bank. Greece's pain looks set to continue. The rest of Europe may well manage to muddle through.