April 30, 2010

EDITORIAL

The Cost of Delay

When the European Union and the International Monetary Fund first talked about a $60 billion rescue for Greece it looked as though that might be enough to calm Europe’s panicky markets. Then Germany dragged its feet, and investors raced to dump Greek bonds and bonds from the financially troubled Portugal and Spain.

Now the managing director of the I.M.F., Dominique Strauss-Kahn, says that as much $160 billion will be needed over three years to cover Greece’s debts and replace private financing that has become prohibitively expensive. Investors took comfort especially after the German government — which may or may not have learned its lesson — said that it hoped a rescue would be in place by the weekend and opposition lawmakers agreed to fast track debate on Germany’s $11 billion contribution this year.

Greece needs money by May 19 when about $12 billion worth of government bonds come due. And if Europe’s politicians balk again, the situation could spin out of control — fast. The crisis could spread beyond Greece, Spain and Portugal and cripple financial institutions in Germany, which own $36 billion worth of Greek debt, and France, which own $54 billion. This isn’t a question of charity. It is one of Europe’s self-preservation.

The Greek government, the European Union and the International Monetary Fund must all work to convince investors that are prepared to do what is needed to keep the country afloat and current on its debt. The $160 billion mentioned by Mr. Strauss-Kahn may do the trick. And it comes with very tough conditions attached. As part of the deal, the I.M.F. and European Union are pressing Greece to cut $26 billion from its budget — almost 10 percent of G.D.P. — by reducing military spending, raising value added taxes, cutting pension benefits and slashing public sector bonus payments.

Some economists believe that Greece may still have to restructure its $360 billion in public debt — agreeing on a plan with its creditors to reduce the principal or interest rates or extend its payouts over several more years. Greece would still need large-scale assistance while it negotiated terms and to be able to pay its bills while it recovered access to private capital markets.

Even shoring up Greece may not be enough to stave off a financial crisis in Europe’s other weak economies. Portugal, Spain and Ireland are all in deep fiscal messes. Instead of waiting for things to get out of control there, the European Union and the I.M.F. should move quickly to put together a large and credible financial package — economists have mentioned up to $1 trillion — and be prepared to release it quickly if needed. Europe’s battered financial markets, and its battered credibility, cannot afford many more weeks like the past one.

Copyright 2010 The New York Times Company