A rescue plan that dare not speak its name

Written by The Financial Times | Updated: Jun 30 2011, 05:53am hrs
By Peter Spiegel in Brussels

Olli Rehn is nobodys idea of a hothead. A mild-mannered Finnish economist, he is regarded, even by his countrymen, as unassuming - verging on dull.

But twice in recent days Mr Rehn, who is the European Unions senior economic official, has been forced to get angry.

At an emergency meeting of finance ministers a week ago Mr Rehn came down like a ton of bricks on Greeces Evangelos Venizelos, who had the temerity to suggest reopening talks on the 28bn euros ($40bn) austerity package that Athens must pass this week to avoid sovereign default.

Those present were taken aback by Mr Rehns ferocity, and Mr Venizelos backed down. Now, Mr Rehn has slapped down the German finance ministry, which suggested on Monday that it was putting together a plan B to rescue Greece if its parliament failed to pass the austerity measures in a vote tonight

To those who speculate about other options, let me say this clearly: there is no plan B, Mr Rehn said on Tuesday. The European Union continues to be ready to support Greece. But Europe can only help Greece if Greece helps itself.

The discordant notes from Brussels and Berlin reflect the EUs contin-uing inability to communicate its intentions coherently.

But this time, the discord also reflects the brutal reality that is setting in: the fate of Europes single currency - as well as the continents nascent economic recovery and the stability of its banking sector - may ride on the vote of a noisy Greek legislature surrounded by riot police and clouds of teargas.

That reality has put Europes leaders in a near impossible position. As a matter of principle, and of domestic political necessity, eurozone ministers cannot offer Greece help unless it takes the tough medicine dictated by the EU and the International Monetary Fund.

Eurozone bail-outs for Ireland, Portugal and Greece are predicated on this simple principle: international lenders cannot make quarterly aid payments unless the beneficiary countries hit their debt and deficit targets - or make tough adjustments to get back on track. At the same time, European leaders face the reality they faced a year ago when they first rescued Athens. A Greek default is not only a Greek problem. It would send shockwaves through the global financial system in a potential Lehman-like repeat, made more difficult because there are scant public resources to cushion the blow and stimulate an economic recovery.

So a plan B must be contemplated - just not acknowledged. Even privately, senior European officials simply smile and shrug when asked if the EU would pay Greece the 12bn euros loan it needs by July 15 if its parliament votes against austerity. Bridging loans from eurozone countries have been contemplated before and could, with short-term borrowing by Greece on the T-bill market, buy time. In any case, plan B could just be a faster version of plan A. Already, Greeces debt pile is being gradually replaced by loans from public sector entities, be it the bail-out funds backed by fellow eurozone governments or loans to Greek financial institutions by the European Central Bank - which are provided in exchange for nearly worthless Greek bonds.

If this continues, the public sector would eventually become the only creditors to Athens, making market contagion impossible, since no market for Greek bonds would exist.

Speeding up the process would be costly: the European Commission estimated in February that Greece needed to borrow about 80bn euros every year to finance its public sector. But an open-ended commitment to take over all Greek lending would stop the current panic.

At the end of the day, all plans being mooted are just a variation of a total takeover. Some would have private bondholders pay more, others would squeeze more out of Greece, through mass privatisations and more skilful tax collection.

For eurozone government, it is by no means a palatable plan B, especially when anti-bail-out parties in Europes northern creditor countries are suddenly making strong. But if Athens fails Europe again tonight, there may not be any choice.

The Financial Times Limited 2011