By JASON MA, INVESTOR'S BUSINESS DAILY Posted 02/09/2012 06:56 PM ET
A second Greek rescue package is finally poised to move ahead but may merely delay the country's eventual exit from the euro.
After several delays, Greek leaders barely committed to steep wage, job and pension cuts Thursday, a prerequisite for the bailout that's needed to prevent a messy March default.
Reaction was positive, but the latest pledge comes at a high cost. The brinksmanship and missed deadlines have renewed doubts about Greece's future in the currency union.
Greek leaders want to remain in the euro over the long term, but a temporary exit is possible, said Andrew Wilkinson, chief economic strategist at Miller Tabak.
Thursday's agreement may mean the government is more serious about staying, but "it's still a tough call," he told IBD.
Citigroup analysts earlier this week raised the odds that Greece leaves the euro zone in the next 18 months to 50% from 25%-30%. And that assumed a bailout and austerity agreement.
Securing this second rescue won't resolve the crisis.
Greece's bailout has been a moving target, and its political leaders aren't trusted to deliver on austerity and reform. The country faces new elections in just a few months, and more strikes are planned. Greece's rescuers are losing patience.
The Dutch prime minister said Wednesday the euro zone could go on without Athens. German Chancellor Angela Merkel repeated that she wants Greece to stay but warned that domestic politics limit what she can do.
Some analysts expect Greece to ask for a third rescue. When that bill arrives, Europe may balk and Greek voters could throw the country upside down. Far-left groups are gaining support.
Bearing Gifts To Greece
The price tag for Greece started at 110 billion euros in May 2010. By July 2011, it was clear that wasn't enough, so a second bailout of 110 billion euros was penciled in. That grew to 130 billion euros months later. Now it looks more like 145 billion euros.
The tab is getting bigger in part because the Greek government hasn't lived up to austerity promises, said Sung Won Sohn, economics professor at Cal State Channel Islands.
"Even if they do get through their current crisis, it will happen again," he said.
He sees Greece and the rest of the euro zone agreeing on a breakup that includes separation money to ease the transition back to the drachma.
Worse-than-expected economic conditions also widened budget deficits and the bailout bill. But proposals from Germany and France underscore their lack of trust in Greece.
Germany drafted a plan to install a fiscal overseer in Greece to veto profligate budgets. The backlash from that led to plans for a bailout escrow account that covers debts but is beyond the total control of Greek politicians.
The consequences of leaving the euro are so harsh that Nariman Behravesh, chief economist at IHS, thinks Greece will stay. Returning to a devalued drachma has limited upside because Greece doesn't export much, he added.
"It's worse than what they're going through today," he said. "But it's possible in a game of chicken, the Greeks might leave ."
The austerity required in the second bailout will perpetuate Greece's recession and budget deficits, setting it up for a third bailout as soon as later this year, said Ludovic Subran, chief economist at credit insurer Euler Hermes.
While there's a chance Greece might ditch the euro, Europe's leaders have gone too far rescuing the country to let it leave, he added. But that means Greece's fate will remain tenuous through this year and into next.
"I see a protracted limbo for quite some time," Subran said.
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