Greece's fight to win its second international bailout may onlyopen a new chapter in its struggle to remain in the euro area.

The rescue plan, which European officials and Greek creditorssay may be wrapped up in coming days, includes a loss of more than70 percent for bondholders in a voluntary debt exchange and loanslikely to exceed the 130 billion euros ($171 billion) now on thetable.

That won't stanch the bleeding, say economists including HolgerSchmieding of Berenberg Bank in London. Greece will be saddled withtoo much debt, too little growth and too large a budget hole to dowithout even more money that euro nations led by Germany areincreasingly reluctant to offer, they say.

“Greece is in deep trouble,” Schmieding said in a Jan. 30report. “The current Greek adjustment program is failing. Excessiveausterity, a lack of supply-side reforms, administrativeincompetence and political deadlock have pushed the Greek economyinto an apparent death spiral. More of the same will not work.”

As Greek officials negotiate with representatives of theso-called troika — the European Commission, the European CentralBank and the International Monetary Fund — Deutsche Bank AG ChiefExecutive Officer Josef Ackermann may travel to Athens this weekendfor talks over a swap involving Greek debt with a face value ofabout 200 billion euros.

Greek Prime Minister Lucas Papademos said today the country isclose to completing the bailout talks.

“We are in the final phase of this very critical process toshape a new financing program for Greece and to complete the loanagreement which will lighten the burden of public debt and ensurefunding for years to come,” Papademos said in a statement posted onhis website.

The euro is headed for a weekly decline against all of its 16major peers. It rose 0.2 percent to $1.369 at 11:45 a.m. in London.The yield on Germany's benchmark 10-year bond fell 1.5 basis pointto 1.84 percent, while the yield on Italian 10-year bonds declined2 basis points to 5.58 percent.

Creditors are prepared to accept an average coupon of as low as3.6 percent on new 30-year bonds in the exchange, said a personfamiliar with the talks, who declined to be identified because afinal deal hasn't been struck yet. The aim is to cut Greece's debtload to 120 percent of gross domestic product by 2020 from 162percent in 2011. The alternative is an uncontrolled default thatmay lead to deeper losses and ripple effects throughout Europe.

Agreement Seen

An agreement could be reached “in the coming weeks, maybe days,”said Ackermann, also chairman of the Institute of InternationalFinance. The group, based in Washington, has more than 450financial firms as members and is representing private creditors inthe talks.

Meantime, the finance ministers of the AAA-rated euro countries— Germany, Luxembourg, the Netherlands and Finland — are set tomeet today in Berlin to discuss options.

“We can't pay into a bottomless pit,” German Finance MinisterWolfgang Schaeuble said yesterday. “Greece needs a new program,there's no question about that, but Greece must create theconditions for it.”

Greece remains in intensive care more than two years aftertriggering Europe's debt crisis, testing the patience of otherEuropean Union nations. Last November, when discussing the Greeksituation, French President Nicolas Sarkozy and German ChancellorAngela Merkel for the first time raised the prospect of a country'sexit from the euro.

Failure to control Greece's troubles helped to push Ireland andPortugal into rescue programs, to raise borrowing costs for Italyand Spain, to embroil the European Central Bank in a controversialprogram of sovereign-bond purchases and to prompt Standard &Poor's to strip France of its top credit rating.

Greece has lagged behind budget targets set when it won aninitial, taxpayer-funded rescue of 110 billion euros in May 2010,prompting euro-area threats to cut off aid and hastening a Germanpush to make bondholders contribute. The country is in its fifthyear of recession, with a budget deficit still close to 10 percentof gross domestic product and unemployment of around 18percent.

Bond Payment

Facing a 14.5 billion-euro bond payment on March 20 and generalelections as soon as April, Papademos's caretaker government mustheed familiar calls by the euro area and the IMF for tighterausterity to complete the talks on a second aid package. Thedemands are also for lower wage costs and the deregulation ofprofessions including lawyers and truck drivers.

The cuts risk triggering a “social explosion,” Hieronymos II,the head of Greece's Orthodox Church, said in a statement posted onthe website of the Archdiocese of Athens.

“We are being asked to take even larger doses of a medicine thathas proven to be deadly and to undertake commitments that do notsolve the problem, but only temporarily postpone the foretold deathof our economy,” the Archbishop said.

Greece will default on its debt and is likely to leave the euro,Nobel economics laureate Paul Krugman said yesterday at aconference in Moscow.

“The Greek situation is essentially impossible,” Krugman said.“They will default on their debt. In fact they already have. Thequestion is whether they will also leave the euro, which I think atthis point is more likely than not.”

Bloomberg

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