Government employees protest austerity measures outside the Greek Finance… (Thanassis Stavrakis / Associated…)
Reporting from Athens — The unthinkable has become the inevitable three times in Europe's debt crisis: First Greece, then Ireland and now Portugal have all appealed to their neighbors to bail them out after insisting they would never do so.
Now a growing number of economists are urging European finance officials to take a rare and drastic step: Let one or more of the countries go into default.
Euphemistically it's called restructuring their debt, a move that would involve easing the terms of the loans and possibly writing off a portion altogether. Despite the initial shock such a move would cause, advocates say it offers the best chance for the countries' economies to get up and running again rather than remain crippled by debt that becomes ever more of a burden, not less.
Calls for restructuring are coming from experts across the continent, and politicians have broken the taboo on talking about it. German Finance Minister Wolfgang Schaeuble, whose government has put up much of the bailout money, suggested this week that restructuring could be an option if the countries' debts were judged unsustainable.
The official European line is still "No way." Officials fear that even talking about a nation defaulting will frighten investors and spread the crisis to bigger Eurozone countries such as Spain.
"A lot of people who discuss this fail to do the analysis of the costs and put those up against the potential benefits," George Papaconstantinou, Greece's finance minister, said in an interview here this week.
Forcing creditors to take "haircuts," or losses, would devastate Greek banks, which hold a major share of their country's debt, and potentially set off a wider panic, he said.
"Therefore we do not entertain this idea. I know that a big part of the market expects it, but both ourselves as well as the institutions that are backing us … do not consider this as an option," Papaconstantinou said.
Any debt-relief program would certainly have fallout. Bondholders would cry foul, voters in lending nations would be outraged, and the fiscal reputations of Greece, Ireland and Portugal would suffer. Clawing their way back into the markets would be difficult.
But better that, say supporters of restructuring, than saddling those countries with debts they'll struggle to service, much less repay, as their economies sink further through rising unemployment, slumping demand and ever increasing austerity. And instead of fanning the flames of the crisis toward Spain and beyond, restructuring would help confine it to the three small economies engulfed so far.
On Friday, Papaconstantinou unveiled a three-year plan for cutting public spending and privatizing state assets to show that Greece is capable of taming its budget deficit, making its economy more competitive and meeting the demands of the $159-billion rescue package it received last year from the European Union and the International Monetary Fund.
The new plan, subject to approval by lawmakers, envisions $38 billion in budget cuts and a greatly expanded role for private enterprise. In a nationally televised address, Prime Minister George Papandreou said his government's aim was "to restructure Greece altogether, not its debt."
Athens has already undertaken a raft of austerity measures that last year scaled back the deficit from more than 15% of gross domestic product to about 10%. Public-sector salaries and pensions have been cut and taxes have gone up, igniting violent street protests.
Even so, Athens has missed some of the targets set by the EU and IMF, raising fears about its ability to fulfill its obligations.
Ratings agencies continue to downgrade Greek bonds, whose interest rates are currently higher than they were even before the bailout. The economy shrank by a painful 4.5% last year, more than expected. And though exports grew in the past quarter and tourist bookings are up, a further contraction of the economy is predicted this year.
Greece's debt load relative to its GDP is therefore rising, with projections that it will hit nearly 160% next year, precisely when Athens is supposed to return to the markets for some of its funding — 25 billion euros, or about $36 billion. Many analysts are already doubtful that investors will step forward.
"The market is not going to give Greece 25 billion," said Yanis Varoufakis, an economist who teaches at the University of Athens. "So Europe will have to come up with new loans next year."
Arguably, the EU itself has already offered Greece a restructuring of sorts. Last month, it agreed to lower the interest rates on its emergency loans and extend the period over which they must be paid back.
Some experts say European officials, through leaked comments expressing doubt over Greece's ability to dig itself out of its economic hole, are already trying to soften public opinion about an inevitable default.