07/22/2011 06:41 pm ET | Updated Sep 21, 2011

Greece Debt Plan Falls Short Of Comprehensive Fix As Financial Problems Remain Across Europe

A deal struck by European leaders providing debt relief to Greece has soothed fears of a fresh crisis, but the nation's ailing troubles -- and by extension those of the rest of the continent -- seem far from over.

The fundamental problems remain, experts say. Namely, the Greek economy is in a recession, and a program of deep spending cuts enforced by outside powers hinders its prospects for growth. "The problem with Greece and a lot of the periphery is they're not growing," said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman in New York.

The plan handed down Thursday by leaders of the nations that share the euro provides a framework for allowing Greece to enter a so-called restrictive default -- a move that, though risky, is seen as a way to usher the nation along a path to recovery. Stocks rallied on news of the plan, which pledges a second bailout for Greece. It also aims to calm fears by expanding the powers of a European rescue fund and by outlining an orderly way for Greek debt holders to accept lower payments in exchange for a solid guarantee of their investment.

The European heads of state called their plan "far reaching" in a statement after their meeting in Brussels. But independent experts fear that the program, bold as it may be, does not solve the long-term problems facing Greece and the rest of Europe. Greece still struggles under a punishing mountain of debt, and markets continue to reflect anxiety that the scope of the crisis is larger than the European powers can manage.

"We're missing the big picture, which is: This isn't a crisis for Greece, or for Ireland, or Portugal. It's a crisis of the euro," said Silvio Peruzzo, euro-area economist at Royal Bank of Scotland Group in London.

"It buys time," he said of the plan, but added that "the market will soon return to the idea that we need to discuss default again."

Thursday's plan represents the culmination of a tense week for Europe, as the debt crisis that began in Greece appeared to be spreading across the continent. Interest rates on Italian government debt shot skyward, logging the largest spread in the history of the euro between Italian rates and the yields on relatively safe German debt, according to Bloomberg data.

The crisis seemed to deepen Tuesday when Ireland's debt was downgraded by Moody's Investors Service, calling into question that country's ability to survive financially without outside help. The costs of borrowing for all the weaker nations -- Spain, Portugal, Ireland and Greece -- were climbing to fresh highs, heaping pain on governments already struggling to get their books in order.

Financial markets were sending a clear message: Policymakers would not be able to stem this growing crisis.

And so policymakers responded. In addition to pledging an additional 109 billion euro bailout, this week's plan lays out a menu of options for investors in Greek debt. These investors, largely banks and other institutions, have the option to extend the maturities of their bonds and accept lower payments. Banks can choose among different terms for this arrangement, explained the industry group Institute of International Finance.

That technically counts as a default, and the rating agency Fitch said as much on Friday. But European leaders said they are prepared to guarantee Greek debt in order to protect banks and the broader private sector.

But that will offer only a temporary fix, said Thin, of Brown Brothers Harriman. The "haircuts" under the new plan, in which investors accept less than their original debt contract stipulates, are not enough, he said.

"They've treated the symptoms but not the underlying disease," Thin said. "In order to get Greece, Ireland and Portugal on a sustainable debt trajectory you have to have what they call hard restructuring. That's principal haircuts of 40, 50, 60 percent."

Moreover, debt markets still reflect anxiety over Europe's weaker nations. Yields on Spanish, Portuguese, Irish, Italian and Greek debt fell as the European leaders met, and kept falling when the plan was announced, reflecting a perception that the debt of those countries is less risky. But yields are still high, having fallen only to the levels of early July, Bloomberg data show.

Greece, for instance, currently must shell out about 16.5 percent of money it borrows with a 10-year maturity. Ireland pays more than 12 percent on 10-year debt. Portugal pays more than 11.5 percent. Italy pays just under 5.5 percent, and Spain pays just under 5.8 percent. All of those values are historic highs.

Even German Chancellor Angela Merkel, who is helping to lead the rescue effort, admitted the current plan won't be enough to address long-term issues.

"There are other necessary steps to take," she said at a news conference this week, "and not one spectacular result that will solve all problems."