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Greece hosts a limited time-only credit event Add to ...

In a painfully slow progress, George Papandreou, the Greek Prime Minister, has advanced a few inches toward a strenuous and effective budget-cutting program, to be voted on by the Greek Parliament next week, having won a vote of confidence in the early hours of Wednesday. His courage is to be admired, but the dimensions of his country's debt - a ratio of about 150 per cent to GDP - are such that plans for a managed insolvency would be more practical.

Mr. Papandreou has a majority of five MPs. None of his caucus defected in the confidence vote, but no other MPs joined them - which is no great triumph. The financial markets did feel a little more confident about Greece. On Monday, the price of credit default swaps for Greek public debt - a form of insurance - had risen to a height that meant the markets believe that the Greek government is 86 per cent likely to default some time in the next five years. After the confidence vote, that number fell to 81 per cent. In other words, it's still highly likely.

The Greek economy is so small that a default - euphemistically called a "credit event" - would not in itself be disastrous, especially when compared with Mexico's default in 1982 and near-default in 1994, Russia's in 1998 and Argentina's in 2001-2002.

If the past few years had followed the usual ups and downs of the business cycle, there would be less worry about Greece. The specifically financial character of the crisis of 2008, however, is causing anxiety about some of the European banks that have lent to Greece. But it is part of the business of banking to write down poorly performing loans so as to reflect the risk of default.

Greece cannot be made to recover by means of an ever-accumulating series of rescue loans that will eventually have to be repaid. Its public sector does need serious reform, by privatizations and by an end to gross overstaffing. But if Greece and the other members of the euro zone, along with the International Monetary Fund, continue to play for time, without acknowledging the unsustainability of the total debt or making a realistic and reasonable plan, they will make things worse for all concerned.

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