BRUSSELS -- Greece is out of the frying pan, but it may yet find itself in the fire.
That appears to be the considered consensus of international observers following a 30 billion-euro ($41 billion) aid package put together by the 16 eurozone finance ministers during a conference call on April 11.
Under the deal, the eurozone countries could lend Athens up to 30 billion euros in emergency loans, at interest rates of around five percent.
Together with an estimated 15 billion euros from the International Monetary Fund (IMF), experts say it should be enough to make sure Greece can pay back the 53 billion euros it owes outside creditors this year.
The Greek government put a brave face on its troubles. Prime Minister George Papandreou likened the loan to a "revolver" aimed at international speculators whom Athens blames for driving up its cost of borrowing. Currently, a 10-year loan costs the country nearly 8 percent in interest -- double the amount required from Germany.
Greece has yet to activate the eurozone aid package and may hope its mere existence will be enough to persuade investors to lend at more affordable rates.
But analysts warn the 30 billion euros may be just the tip of the iceberg in terms of the true extent of the problem that the eurozone countries need to address.
Simon Tilford, chief economist at the London-based Centre for European Reform, says the effect of the package may be limited to merely delaying Greek insolvency. "It doesn't address the fundamental concerns, it doesn't address the causes of the underlying problems within the eurozone, but it certainly addresses the immediate threat of insolvency in Greece," he says. "So, the risk of Greece defaulting -- in the short term, at least -- has been reduced very considerably as a result of this announcement."
Tilford notes that the Greek bailout was agreed by eurozone governments only after two months of relentless pressure by the financial markets.
Question Marks Remain
The markets' reaction to the deal will be first seriously tested on April 13 when the Greek government attempts to raise 1.2 billion euros in short-term loans. It needs more than 10 billion euros before the end of May.
The Greek government's situation is more than dire. It has more than 300 billion euros of debt, and its budget shortfall is well into the double digits. In fact, it now invites unfavorable comparisons across the board with Argentina, which defaulted in 2001. Last weekend, the cost of credit default swaps (CDS) for Greece -- insurance against the country being unable to honor its debts -- overtook that of Iceland's.
In case of a default, a restructuring of debt would be likely, leaving investors with no more than an estimated 20-40 percent of their money.
Tilford says there are serious questions about Greece's ability to meet its commitments in the medium and long term. "In order to put its public finances on a sustainable footing, [Greece] needs to get its economy growing," he says. "Now, the cuts in public spending that we're seeing -- combined with the cuts in wages that we're going to see in order to boost the economy's price competitiveness within the eurozone -- risk pushing the economy into a prolonged slump."
Writing in the "Financial Times" today, Wolfgang Munchau predicts Greece will default next year as a result of the severity of its combined debt and competitiveness crises.
With its budget forced into austerity mode by Brussels -- which wants Athens to shave some four percentage points off public expenditure in 2011 -- Greece appears to have run out of options.
The standard remedy for the threat of a prolonged slump, devaluation, is not available to it as a member of the eurozone. And observers consider a return to the drachma to be a cure worse than the disease, almost certainly forcing the country to default on its commitments on the least favorable possible terms.
A Eurozone Divided
The broader situation is compounded by tensions within the eurozone itself, where Germany has fought tooth and nail against a "subsidized" bailout.
The result carries a 5 percent interest rate -- more than what the IMF charges, but less than the going market rate. The head of the eurozone, Luxembourg Prime Minister Jean-Claude Juncker, underscored on April 11 that no lender "will suffer a loss."
This is the minimum acceptable to Germany, whose constitutional court has ruled more than once that the country may not become liable for other countries' debts within the eurozone. The idea of bailing out Greece is deeply unpopular in Germany, where tight fiscal discipline is an ingrained habit.
Revelations that Greece has for years deceived EU watchdogs by doctoring its budget figures have not helped its case. The daily "Sueddeutsche Zeitung" summed up the polite popular feeling today with the headline "Greece Imports Trust."
In the longer term, analysts believe the risk of contagion beyond Greece remains real. Portugal, Spain, and Italy all have weak growth prospects and mounting debt burdens.
Tilford says investors are "going to continue to look at them with very wary eyes," noting that the sums needed by Greece -- and possibly soon Portugal -- are relatively modest in comparison with Spain.
"The problem for the eurozone will be if we see similar problems in Spain to what we're seeing in Greece," he says. "Now Spain is a dramatically bigger economy; the sums involved would be dramatically greater. That will be the real test for the eurozone."
Mynchau, too, observes in his column in the "Financial Times" that "the EU has still not provided a generalized crisis-resolution regime."