Leaked drafts of the Greek rescue package imply the country’s credit rating is likely to be cut to selective default. That will make Greece the first developed country to default since it was last in default in 1964 (according to economist Carmen Reinhart’s history).
Unfortunately, it looks as though the focus has once again been on making it easier for Greece to meet its liabilities by reducing interest rates and extending maturities. Little in the draft would reduce the size of Greece’s debt, which is heading for 170 per cent of gross domestic product. European leaders gave the poor battered can an almighty punt but it is still there on the road.
Still, markets were delighted. Portugal and Ireland solemnly pledged to repay debts, and in return their own cans were hoofed into the distance. Italy and Spain should be helped by the bail-out fund’s new power to buy their debt, part of the plan that does not confuse liquidity and solvency.