Greek fire

The Economist

Jul 12th 2011, 15:08 by Charlemagne | BRUSSELS

ONE CAN understand the anger of George Papandreou, the Greek prime minister. He has faced down riots, mass protests and party rebellion to push through a second austerity and reform package. But a second bail-out from the euro zone that was supposed to tide Greece over until 2014 has yet to materialise (although it did get a €12 billion ($17 billion) tranche of loans to keep going until September).

Last night's euro-zone statement was filled with promises of action, but the details remain slippery (see my post). Indecision is causing contagion; contagion is affecting bigger countries, like Italy. And the contagion of Italy threatens to ravage all of the euro zone, including Greece.

Mr Papandreou's letter to Jean-Claude Juncker, who presides over the Eurogroup of finance ministers, sums up the mismanagement of the euro-zone crisis more eloquently than most. It is worth reading. A long excerpt below:

From our side, as you know, the Greek Parliament has approved the country's promised medium-term financial strategy and implementing legislation—approvals that were required for release of the fifth disbursement of the initial program and for approval of additional funding until 2014.

Our recent Parliamentary votes signal a renewed bold effort and strong political will to reach our goals.

Yet in no sense is our crisis over. Indeed, we together stand today at a fateful juncture in Greece's and Europe's ongoing economic adjustment program.

The markets and rating agencies have not responded as we had all expected. They continue to doubt (and therefore punish) our shared Greek and European reform program, and in so doing, are threatening Greece's and Europe's common recovery from the recession that began three years ago.

I am now convinced, after fourteen months, that no matter what Greece does—and we have proven ready to live up to our responsibilities—if Europe does not make the right, collective, forceful decisions now, we risk new, and possibly global, market calamities due to a contagion of doubt that will could engulf our common union. Strong and visionary European leadership is needed.

I say this to you because now there is a greater need to avoid mistakes of the past. "Crunch time" has arrived and there is no room for indecisiveness and errors such as:

-  taking decisions that in the end prove 'too little, too late' to convince the markets we are serious;

- making compromises that satisfy our internal political 'red lines' that in the end substitute tactical politics for sound management of the crisis (although I do recognize the problems some governments have and the democratic demand for a greater say of Parliaments in trying to deal with this crisis);

-  failing to use in-depth technical analysis and consultation before decisions are made;

-  allowing a cacophony of voices and views to substitute for a shared agenda, thereby creating more panic than security;

-  and I would add more global issues such as doing nothing substantive about the destabilizing role of the rating agencies, credit default swaps, tax havens or about plausible new revenues such as a financial transaction tax.

The above have in one way or another had profound effects on my country and others facing similar challenges.

As for Greece specifically, the attempt over the past ten days to structure private participation in our recovery program, for example, has led to public warnings that the rating agencies would declare a selective default.

While we are not against PSI [NB private-sector involvement] in principle the proposal that was tabled seems to be flawed. It could prove to be too expensive, too little and too dangerous.

Too expensive for Greece and too little or inadequate to effectively deal with the management of Greek debt. And with these meager results one may still not avoid a selective default.

We all also know that, because there is still a deep distrust about the financial health of the banking system in Europe, that the new "stress test" results to be announced in a few days may fuel yet more market insecurity.

All these debates—around the new Greek program, private sector involvement, the amount of funding necessary, the talk of 'selective default'—and the continued cacophony in the media only make the problems in front of us more difficult to solve.

Going from crisis to crisis at such a weak stage of recovery, with such a cacophonous press and frightened public, is not any longer an option Greece can sustain.

Greece is responsible for her past inaction. However over the past year Greece has taken the pain, made unprecedented decisions, and yet we have paid for too much experimentation and confusion.”