Despite growing fears, ministers hope a ‘hard’ default of Greek debt is not on the horizon

EUROPEAN FINANCE ministers have opened the door to yet another easing of the ailing Greek bailout. Their intervention, however, only postpones a crucial moment of reckoning for the beleaguered country.

Although two days of talks were overshadowed by sexual assault charges against IMF chief Dominique Strauss-Kahn, ministers have sent a clear signal that a “hard” default of Greek debt is not on the horizon.

Nevertheless, their decision to contemplate a “reprofiling” of Greek debt points to grave and growing concerns about the fate of the euro zone’s first bailout.

Reprofiling, a new word in the expanding lexicon of the sovereign debt debacle, essentially means a rescheduling of onerous debt payments to creditors. This sounds rather like debt restructuring, itself a form of default, but EU leaders are only reluctantly recognising that this is now in prospect.

Argument still rages in Berlin over the merits and demerits of that, but German chancellor Angela Merkel had firmly ruled out a full-blown default.

If there is to be an effort to ease the burden of Greece’s mountainous debt, the approach will be accretive and, most likely, “softly-softly” in its execution and conditional on acceleration of Greek fiscal reforms.

“I wouldn’t exclude in a definite way a kind of reprofiling. It’s not reprofiling or nothing, it’s measures and measures and measures and then maybe reprofiling,” euro group president Jean-Claude Juncker said on Monday.

By yesterday, however, he went so far as to utter the words “soft restructuring”. Such a departure would lower the immediate interest payment burden, potentially leaving more money in the coffers to refinance existing debt next year. The case is far from clear and tricky questions arise.

The first is fundamental. If such an endeavour merely serves to postpone the evil day of full-blown restructuring, would it not be better to grasp the nettle now?

That remains something the EU authorities don’t want to do. Having decided only in March to put back any private creditor participation in bailouts until the permanent euro zone bailout fund comes into force mid-2013, they are loath to go back on their word so soon and fearful of the potential for more market turmoil.

That EU leaders declared in March that they had finally turned the corner in the battle against the crisis says rather a lot about their lack of control over the situation. The sense is growing that Greece will struggle to avoid default at some point.

But with “hard” compulsory restructuring of Greek debt ruled out for now, another question relates to the likely voluntary nature of a reprofiling initiative. How can private creditor buy-in be secured in sufficient strength for an appreciable financial result if bondholders are not obliged to take part? Furthermore, if private creditors are not to be touched, would a reprofiling exercise yield sufficient benefit if it was confined to bailout loans?

The ministers will return to these issues when next they gather, towards the end of next month in Luxembourg. By that stage they will have the benefit of an EU-IMF “troika” report on the Greek rescue, which is unlikely to make for pleasant reading.

The need for further bailout loans will be clearer by then, raising the likelihood of yet more hard bargaining. The reality is that this has already begun. The ministers have already instructed bickering Greek politicians to pull together in the national interest, with a specific instruction to quickly advance a disputed €50 billion privatisation plan.

The prospect of deeper outside intrusion in its internal affairs has also been raised through a Dutch suggestion that responsibility for the privatisation plan be handed over to an external agency. There’s no unanimity on that but the stakes are clearly rising for the Greeks.

Contrast that with the ministers’ approval of the recently reviewed Irish bailout plan, which was waved through on the nod without much ado.