ANALYSIS:At the core of the Greek rescue package is a gigantic exercise in damage limitation, writes ARTHUR BEESLEY

AS THE drama over an EU/IMF bailout for Greece approaches its denouement, the EU authorities have been at pains to rule out any restructuring of the country’s enormous debt.

Why is this so? The basic answer lies in Greece’s euro membership, fear of contagion, and the sense that the rescue effort has at its core a gigantic exercise in damage limitation.

Further concern centres on the consequences of restructuring for banks exposed to Greek debt. In virgin territory, nobody wants to try anything more drastic than necessary.

This is the backdrop to a rethink this week which saw the European and IMF authorities increase the presumed size of the three-year bailout package to some €120 billion, from €80 billion.

With restructuring deemed unviable for now, the fear was that the original sum would not be large enough to see the country through the crisis. This is allied to the scale of Greece’s existing debt, which is not far off €300 billion.

As prime minister George Papandreou comes under rising pressure to cut spending radically and increase tax collections, the balance his saviours must strike is to ensure there is enough life left in the economy to keep paying the interest.

The concern all along – even if German politicking suggests otherwise – has been to minimise the spill-over from Greece’s slide towards insolvency. An insolvent Greece would default on its debts, threatening havoc in the markets and catastrophe for the euro.

As debt restructuring is a form of default – reneging on one set of contractual obligations to secure less onerous terms – the fear is that such an action would intensify the problem it was designed to solve.

In the highly sensitive atmosphere that prevails, there is no appetite to test the theory in real time.

Even though restructuring might make life easier for the Greeks in the short term and lessen their need for emergency loans, it could well have the unplanned consequence of increasing the spill-over from an already fraught situation.

A high-level source well versed in the debate over the rescue makes the argument that Greece’s membership of the euro means restructuring is not comparable with the debts of Argentina, Mexico and Russia.

“Here you’re talking about a country which is part of a monetary union,” the source says. “The other countries wouldn’t like to see restructuring because their reputation would be tarnished. It is basically a default.”

Then there are the consequences for banks, which would have to take a big discount on their repayments in the event of a restructuring. Their potential losses on Greek bond write-downs are significant, as a restructuring “haircut” would have to be very big to justify the associated reputational damage and offset the threat of any further default.

Figures from the Bank for International Settlements show that European banks are exposed to Greek sovereign debt to the tune of $188.6 billion (€142.4 billion); French banks are owed in excess of $75 billion, the Germans are owed $45 billion, the British $15 billion, and the Dutch almost $12 billion.

The exposure of US banks is more than $16 billion.

With governments across the board already deep into bank bailouts, restructuring Greek debt would create yet more difficulties.

A further concern is the “technical impact” of Greek government default, which would see its bonds fall out of the refinancing scheme operated by the European Central Bank (ECB). At present, banks can refinance themselves in the ECB by offering Greek bonds as collateral. A restructuring would reduce the amount of collateral available for that purpose.

At the end of the day, the Greek rescue is more about self-preservation than kinship. Greece would have been left for dead long ago if this was not the case – kindly words about solidarity with its beleaguered people notwithstanding.

The fundamental dynamic in this affair is fear that the country could pull other euro members below water if it sinks. This – and nothing else – is what has galvanised Europe’s leaders to take steps not foreseen when they created the euro 11 years ago.

To borrow from the Anglo Irish Bank calamity, a rescue that enables Greece to fully meet its obligations is still seen as the least worst option.