EU debt forgiveness ahead in Greek mire
Within minutes of eurozone finance ministers reaching a deal to cut Greece's debt, commentators on Twitter were dismissing it as another exercise in "kicking the can down the road".
To an extent that is true. Under the agreement, the eurozone and the International Monetary Fund will give Greece two more years to reach its budget goals and will find another €44 billion (NZ69b) to keep the country afloat in the meantime.
But while a degree of can-kicking may be going on, there was a critical element in the deal that goes a lot further than any other step taken so far in the debt crisis to get Greece back on its feet.
Implicit was an understanding that Greece will undergo some form of official-sector debt restructuring - with eurozone countries forgiving a portion of Greece's debt - at some point in the future, the sort of last-ditch measure usually reserved for impoverished states in Africa and Latin America.
At a news conference shortly after the deal was struck, German Finance Minister Wolfgang Schaeuble came closer than he has ever done before to publicly acknowledging that creditors face such an eventuality - a move that will be very hard for the likes of Germany, Finland, Austria and the Netherlands to take.
"When Greece has achieved, or is set to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," he said, looking weary after 13 hours of negotiations.
The timing and reference to a primary surplus are important.
The Greek economy is forecast to return to growth during 2014 and to achieve a primary budget surplus - the balance before deducting the cost of debt financing - of 4.5 per cent of gross domestic product (GDP) in 2016.
By the end of that year, the EU-IMF assistance programme should be over and Greece will in theory be on its own, financing itself in the financial markets in the normal way.
Monday night's deal took care of the extra financing Greece will need between 2014 and 2016 and set out a series of steps the eurozone and Greece will take to get its debt level down from around 190 per cent of GDP next year to 124 per cent by 2020.
But what it didn't set out in precise detail is how Greek debt will go on falling, from 124 per cent of GDP in 2020 to 110 per cent in 2022 and 88 per cent in 2030, as agreed during the talks.
And it didn't say how Greece is expected to win back market confidence in 2016 even though its debt level that year is still expected to be 175 per cent of GDP.
The answer is a combination of lower interest rates and longer maturities being applied to loans to Greece, Athens paying down more of its own debt thanks to growth and the potential for eurozone states to write down their loans.
"Euro area member states will consider further measures and assistance, including lower co-financing in structural funds and/or a further rate reduction in the Greek loan facility if necessary," said Olli Rehn, the commissioner for economic and monetary affairs, again hinting at the possibility of a more fundamental overhaul of debt at some future point.
A European Union official closely involved in the discussions on Greece said there was a general unwillingness among euro zone countries to acknowledge that they may have to forgive some of the €127b they have so far lent to Greece, even if all of them know the issue can't be avoided forever.
In order to make Greece's debt sustainable in the long term, the IMF has determined that it must be cut to around 120 per cent by 2020 and 110 per cent by 2022. But there is no guarantee those levels will be sustainable on those dates.
As a result, the prospect of a debt writedown has to remain, especially as the eurozone countries, who will soon be responsible for around three quarters of all Greek debt, have said time and again that they will do what is necessary to keep Greece afloat and in the euro zone.
The EU official said the best option would be for eurozone countries to bite the bullet and write down €40-5b of loans to Greece in 2016 or shortly afterwards, so that its debt-to-GDP ratio is aggressively reduced and the country can more easily return to financial markets.
But that is unlikely to happen, since no member state wants to write down any Greek debt, the cost of which would be born by taxpayers. Each state will do everything possible to ensure that any writedown, if it must happen, is as small as possible.
"If you were really going to help Greece, you'd write off enough debt to get the ratio down to 60 per cent of GDP, which is a decently sustainable level," the official said. "But that's never going to happen. No one's going to buy that."
Instead, the possibility of debt forgiveness will hang over the eurozone for the next four years and will, whether countries like it or not, have to be tackled at some point.