The Greek Rescue Plan Is No Rescue at All • Egypt’s Uncertain Path to Democracy

A writedown of Greece’s debt is the only way out of the euro area’s crisis

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 area finance ministers and the International Monetary Fund 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 weeks of 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 program, even among Greeks who believe in making the changes and sacrifices demanded.

The deal, however, doesn’t do enough to address the biggest issue: a Greek government debt burden that, at about 170 percent of gross domestic product, remains unbearable under any reasonable scenario. The agreement assumes that Greece will largely grow its way out of the problem, reducing its debt to less than 110 percent of GDP by 2022 even as it endures the crushing austerity required to sustain a budget surplus of 4 percent of GDP.

Germany and other creditor nations refused to consider the simpler and more 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 percent of GDP by 2020.

The contortions might be necessary to help the deal get through the various national parliaments that must ratify it, but they could extract a higher price down the road. Some euro area countries, for example, will now be paying more to borrow money than they receive in interest from Greece. Much of the burden will fall on countries also in economic trouble. Italy and Spain, for example, will have to pay Greece for the privilege of lending to it, because their financing costs are higher than the reduced interest rate at which Greece will borrow.

The debt buyback from private investors, too, promises to be problematic. In a ham-handed attempt to ensure the buyback’s benefits, the bailout agreement stipulates that Greece can’t pay more than the closing price of its bonds on Nov. 23. As a result, the government might not be able to find investors willing to sell their bonds at its offer price — an outcome that could jeopardize the release of the IMF’s €43.7 billion ($56.5 billion) share of the bailout money, which is contingent on the completion of the debt buyback.

Europe’s leaders would do well to move ahead with the Greek debt writedown they have tried so hard to avoid. If, for example, they cut the government’s debt in half, and if its market borrowing cost could be brought down to about 5 percent, Greece could hold its debt burden steady by running a primary budget surplus (excluding interest payments) of roughly 1.5 percent of GDP. The upfront costs would be greater, but so would the chances of success.

Mursi must use his powers to protect Egypt’s revolution, not subvert it

Egyptian President Mohamed Mursi appears to be struggling with the concept of separation of powers in a democratic system. Whether he masters it will determine Egypt’s chances of becoming a genuine democracy.

Mursi’s latest effort to grab authority to which he is not entitled is worrisome because it’s his second such offense. In July he tried unsuccessfully to defy a court order nullifying parliamentary elections dominated by the Muslim Brotherhood, an organization with which he is aligned. This time he went after the judiciary because he suspected it was about to dissolve the assembly writing Egypt’s new constitution. He issued a decree that stripped the courts of that power, granted himself wider authority, and immunized all presidential orders from challenges until a new constitution is passed.

The reaction within (and without) Egypt was furious. The president has since tried to soften his approach; aides have said he will only apply his order to suspend judicial review over acts that protect major institutions of the state. They say his motives are good — that he wants to protect the revolution from remnants of former President Hosni Mubarak’s regime in the courts.

Motives are irrelevant. The revolution created a rudimentary balance of power that didn’t exist under Mubarak. To disrupt this positive balance marks a retreat from democracy. Once powers are arrogated, there’s little record of leaders returning them.

Mursi can still correct his course. He can officially revoke his decree and have the constitutional assembly put itself above the courts, though not above the Parliament that appointed it. With no Parliament currently in place, Mursi, by law, holds its powers.

Paradoxically, that means Mursi’s authority is the key to solving the larger problem posed by the assembly. To protect against the tyranny of the majority, Egypt’s minority Christians, liberals, and secularists must play powerful roles in the drafting. Mursi needs to find a way to ensure non-Islamists are satisfactorily represented on the committee. Otherwise, the constitutional draft will become a new source of conflict.

To stand the test of time, such a foundational document has to encompass the aspirations of the widest circle of people. In guaranteeing that happens, Mursi could make the best possible use of the powers he already has.

To read Jonathan Weil on the Hewlett-Packard blowup and William Pesek on central bank leaders, go to: Bloomberg.com/view

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