Europe's Plan C for Greece no better than previous plans

Europe's leaders have reached Plan C in their efforts to rescue Greece. Unfortunately, it lacks a crucial element also absent in plans A and B: adequate debt relief.

The agreement between euro-zone finance ministers and the International Monetary Fund is welcome and overdue. It provides much-needed support for a Greek government that has taken enormous political risks to meet the conditions for aid.

It also puts an end to bickering between Europe and the IMF over how to cover Greece's funding shortfall - a delay that had threatened to undermine faith in the bailout programme, even among Greeks who believe in making the changes and sacrifices demanded.

The deal, however, does not do enough to address the biggest issue: a government debt burden that, at about 170 per cent of gross domestic product, remains unbearable under any reasonable scenario.

It  assumes that Greece will largely grow its way out of the problem, reducing its debt to less than 110 per cent of GDP by 2022 even as it endures the crushing austerity required to sustain a budget surplus of 4 per cent of GDP.

In other words, this is just the latest in a long line of stopgap measures to fend off the kind of disorderly default and euro exit that could trigger contagion in the much larger economies of Spain and Italy.

Germany and other creditor nations refused to consider the simpler and effective solution of writing off some of Greece's debt to official lenders, a move that would amount to an explicit fiscal transfer. Instead, they agreed to reduce Greece's debt-service costs, extend its repayment period and lend it money to buy back bonds held by private investors. Taken together, these measures are supposed to amount to debt relief equivalent to about 20 per cent of GDP by 2020.