Next for Greece: buying enough time to pay off debts

The Greek parliament's approval Wednesday of an austerity package of spending cuts and tax hikes means the country will most likely receive the international loans it needs to pay off debts due July 15. But if agreement isn't reached on a debt restructuring, Greece and its international lenders will once again be at a standoff this fall.

The $142 billion bailout finalized in 2010 is being meted out in increments to keep Greece's reluctantly promised economic reforms, taxes, and cuts on track. Another portion of the loan is scheduled to be released in October, but there's nothing to prevent another protracted round of wrangling, particularly if lenders like Germany aren't convinced Greece is doing its all to cut spending and increase revenue.

"It's going to buy some weeks to think about the next round. It's going to give some breathing room," says Domenico Lombardi, a senior fellow at the Brookings Institution in Washington. That time will need to be used to set out a path for the more far-reaching program the Europeans are looking for.

Today's agreement also paves the way for the approval of a second IMF program that will extend until 2013 or 2014 and is designed to help Greece avoid default and to ease austerity measures. "The aim would be to ease the cost of adjustment of the Greek people," Mr. Lombardi says.

On Thursday, the parliament will vote on legislation to implement the austerity measures and remove legal obstacles to privatizing state assets, a key demand of European finance ministers. The privatization program could raise as much as $70 billion some day, according to The Washington Post.

Jacob Kirkegaard, a research fellow with the Peterson Institute for International Economics, says he's hopeful that Greece will have a privatization plan drawn up by October. It will also need to show progress on increasing tax receipts (the country is plagued by tax evasion) and executing the cuts and taxes approved today. The government will be "held to task" every time a tranche is scheduled to be delivered, says Mr. Kirkegaard.

But even if all that is done, it's hard to see privatization raising much money in the short term. After all, Greece has been plagued by riots and labor strikes over the spending cuts, not exactly the sort of environment investors want to see. Reforming the tax system is the work of years.

What all this means is that no matter what foreign finance ministers request, or what Greece agrees to, it won't be enough to pay off government debts approaching $500 billion. Down the line, the country will likely have to restructure through cutting its debt principal and/or rolling it over, giving the Greeks more time to pay it off.

The process for restructuring is a tricky one that will require careful cooperation and persuasion to prevent a negative response from rating agencies, Lombardi says.

The option is considered unfeasible at this point because the European economy is too weak, but it is increasingly being seen as impossible to avoid in the long run. A Wall Street Journal blog today about the option of restructuring was headlined "Delaying the inevitable in Greece."

"Greece has more debt than it will ever be able to pay in full," Kirkegaard says. The IMF programs are merely "buying the country time" to improve its economic performance.

When the full IMF program for Greece runs out in 2013 or 2014, the hope is that the European banking system will be strong enough to weather a restructuring and not risk problems throughout the eurozone.