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Greece Out of Default Emergency Room, But Far From Being Cured

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I spent a nerve-racking night a block away from the European Central Bank headquarters in Frankfurt until the news came at 6 am that 85% of the 177 billion euros ($233 billion) was voluntarily presented by private investors for conversion in the largest sovereign debt restructuring in history.

The non-transparency of the process had left everyone guessing on what that ratio would be. News from Greece indicated that the Greek trade unions were trying to derail the participation of Government-managed funds to the conversion.

One thing was clear: below 66%, the operation would have been a failure; it is indeed the threshold of the ability of Greece to utilize the Common Action Clauses (CAC) to force other bondholders to convert.

With 85%, it should avoid using them, although I would not be surprised if Greece had committed to do so as a condition imposed by the International Institute of Finance negotiating steering group on behalf of the private sector.

Media speculated on a number ranging between 66 and 95%. At 85%, the operation is undoubtedly a success. The shock treatment of the emergency room of the European Union and the IMF worked.

Slowly, Greece will emerge from coma and realize that 100 billion euros of its 350 billion is gone; thanks to the private sector, a 130 billion euro public bailout is now in place. As after any medical emergency and a huge blood injection, the body reacts slowly.

This is not a triumph: it is one of the worst sovereign debt restructuring in history. It laid bare the lack of governance of the Eurozone and the risks it carries for the Euro and the Eurozone. The satisfaction of this indispensable achievement and step should not hide the fact that it would have been at least three times more costly than needed. The Eurozone needs a serious reform and structures that are less dependent on political infighting.

The Heads of State and Government of the Eurozone, and primary Frau Merkel and Monsieur Sarkozy, were not able to take swift and decisive actions and assume their leadership responsibility as the two countries who represent together 47% of the Eurozone. That lasted over two years. It is in May 2010 that one of the twenty European summits on the Eurozone crisis decided to create a 400 billion euro European Financial Stability Fund to rescue Greece. So far, it lent less than 20 billion euros, and nothing to Greece.

It is abnormal that the private sector is the only one to accept to take a loss on its exposure of Greece while the public sector, which is at the origin of the crisis, lends without risk. This is a reverse moral hazard of some sort that will have implications on sovereign borrowings for the next decades. For two years, it is Europe who failed. The "participation" of the private sector ended up with no participants from the public sector. There is a lesson there and sovereign debt investors learned it the hard way.

Will Greece adjust its public sector to the realities of its financial resources?
Will these resources be increased by an effective taxation system? Will the Greek Army be seriously scaled down now that Turkey is part of NATO? Will civil servants be paid at a rate comparable to other European nations? Those questions are crucial.

When a patient gets out of the emergency room and emerges from coma, he or she needs to take medication to heal and eventually cure from its disease. After a transplant, a patient needs to take medication for life, even if the medicine is painful. There is no alternative.

Do Greek authorities and its public opinion understand that, unless they play by the rules and restore their fiscal discipline, there will soon be another default... and no bailout? Nothing is less sure. This is not a few bad years; it is a different way to manage a country. There will be no return to the past bad habits of the past.

This will be the ultimate test of the success of today's gigantic bailout.