New York Times blames european policies regarding Greece

From NY Times:

Fumbling Toward Default

Published: July 6, 2011

An outright default by Greece on nearly a half-trillion dollars of outstanding debt obligations would be a catastrophe for Greece, for its European creditor banks and for financial institutions everywhere as credit-default swaps on Greek debt worked their way through the derivatives markets. It does not need to happen, but barring an unexpected show of European political and economic leadership, that outcome is becoming increasingly likely.

The latest chapter in the sorry saga was written over the past week. At the insistence of European political leaders, Greece’s governing Socialists voted to apply another dose of growth-killing austerity to the country’s nearly inert economy. Austerity measures in the past have done more harm than good, but threatened with a cutoff of needed European loans, the Socialists saw no other responsible course. (Opposition conservatives ignored European pressures and voted no.)

In return, Europe was supposed to release the next installment of bailout money and come up with a new long-term assistance plan designed to permit Greece to recover and repay. Predictably, the short-term money, urgently needed to keep French and German banks solvent, was easily approved. Long-term relief, urgently needed to keep Greek hopes for recovery alive, was put off until after Europe’s August holiday.

Waiting accomplishes nothing. In two months, there is every likelihood that Greece’s debts will be larger, private investors more skittish, and interest rates higher. And the re-election contests that dominate the thinking of Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France will be that much closer.

Greece’s debts will keep rising as interest rates remain very high and its economic growth very slow. Greece now pays more than 20 percent for private lending and more than 5 percent for European bailout money. Its economy has been shrinking for a third straight year.

Lower interest rates and higher growth rates are the key to avoiding default. One quick way to reduce interest rates would be to issue new European bonds to refinance much of Greece’s existing debt. The European Union, which has a good credit rating, can raise funds at between 3 percent and 4 percent interest. Other options exist, but all involve refinancing by existing Europe-wide financial institutions, like the European Central Bank, or new ones.

Given enough time, and enough fiscal room to restart growth, Greece could pay back the refinanced debt in full. Relaxing Europe’s demands for fiscal contraction, together with tax reforms, privatization of publicly owned services and utilities, and continued efforts to reopen the Greek labor market, could help generate sufficient growth for Greece to begin paying down its debts.

Mrs. Merkel, Mr. Sarkozy and other European leaders, however, are not even talking about this kind of approach. They focus instead on complex and dubious plans to disguise the losses of their banks. They insist against logic and evidence that private lenders will voluntarily participate in refinancing Greek debt. They still pretend that Greece is not slowly moving toward default. Such blinkered views do not help Greece, and will not prevent default or mitigate its consequences.