Three questions the Greek debt summit must answer

July 20, 2011

By Pierre Briançon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The best signal that the euro zone may be nearing a Greek debt deal is that its leaders have decided to hold a summit. With investors questioning Europe’s determination to tackle its debt problems, ending the high-profile meeting on an inconclusive note would be unconscionable. But how should success be gauged? That depends on the answer to three key questions.

First, does Greece get some relief? The goal is to come up with a package that lightens the country’s debt burden and provides it with funding for the next three to four years. A bond buyback programme could allow Athens to take advantage of its distressed debt status by buying back some bonds. This could be done by the European Financial Stability Facility, or by the European Central Bank, supported by a euro zone government guarantee. At the same time, the interest rate on the existing bailout should be lowered, and the maturity of the loans extended.

Second, is there an agreement on private sector participation? Germany insists that banks and others private creditors must share the pain. But governments must spell out what form this will take. A levy on the banking sector has gained ground in recent days. The idea is fraught with risks, could be counter-productive and shouldn’t even be on the agenda.  Adopting it would send the ominous signal that governments can’t agree on anything more substantial.

Third, is the European Central Bank on board? The ECB so far has played its cards well, forcing governments to step in and take responsibility for the Greek mess. It will only agree to cooperate in a new bailout — compromising at last on its rigid opposition to any form of default — if it believes governments are tackling other issues such as recapitalizing weak lenders. Any indication that the ECB is refusing to play ball means the plan won’t fly.

The summit doesn’t necessarily have to come up with a detailed plan. Greece doesn’t have short-term funding problems, and a few technical issues can be explored for another month or two. But investors will want a signal that the euro zone is getting to grips with the problem. Anything short of a strong consensus on the plan’s main points would send markets into another debt panic attack — with repercussions far beyond Greece.

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