Brussels blog

The financial rescue plan devised by eurozone governments for Greece doesn’t look like a rescue plan in the classic sense.  Like a thermonuclear weapon, it appears intended never to be used at all.  The idea is that the Greek government itself, backed by calmer financial markets, will succeed in overcoming its debt crisis without ever drawing on assistance from its 15 euro area partners.

The central element of the plan is that individual governments would, on a voluntary basis, make loans available to Greece at an interest rate that would make Greece think twice before putting in a request for help in the first place.  This, it is thought, will reinforce Greece’s commitment to the drastic austerity programme that the socialist government has drawn up since coming to power last October.  Meanwhile, experts from the European Central Bank, the European Commission, the eurogroup of eurozone finance ministers and the International Monetary Fund will supervise Greek economic policies and guide a wholesale restructuring of its public administration and tax system.

The plan has the fingerprints of Germany and other advocates of strict fiscal discipline all over it.  But there are also legal reasons why the eurozone has gone down this path.  The “no bail-out” clause in EU treaty law is taken extremely seriously in Germany and like-minded states, and there are worries that any softer plan for Greece would trigger popular anger and even constitutional lawsuits in Germany.

At first glance, the success of the plan appears to rest on the willingness of financial markets to treat it as credible.  If they don’t, they will continue to keep Greek bond yield spreads high in relation to German debt, and Greece will find it harder and harder to extract itself from crisis.  This morning there was a small positive sign as the spread on Greek 10-year government bonds eased below 300 basis points from a peak of almost 400 basis points in late January.

But the plan also assumes that the Greek population will swallow its medicine at least until the end of 2012.  With a 4 per cent drop in economic output possible this year, public sector wage cuts and rising unemployment, it is a bold assumption.