European leaders move closer to new Greek rescue plan

Time is running out for salvaging Greece and, beyond it, Europe’s shared currency, the euro. Thursday’s emergency summit meeting looms as a Lehman Brothers moment.

If Europe’s leaders fail to extricate Greece from its current unsustainable debt-servicing obligations — by lowering interest rates and lengthening maturities at a minimum — the market reaction, for all of Europe, may be unforgiving, and uncontainable as investors conclude that no European sovereign debt is safe from possible default.

Had Europe faced up to the Greek problem a year and a half ago, the crisis would likely be more contained and manageable today. It should have reached a broad pact with Athens by trading growth-promoting reforms for long-term financial guarantees and relief.

But that would have meant telling taxpayers in Germany and other northern European countries that they might have to finance some of the bailout and recovery costs (as they will end up doing anyway). And it would have meant acknowledging that heavily exposed German and French banks might have to be recapitalized at taxpayer expense.

Instead, European Union leaders imposed on Greece harsh austerity conditions that suffocated growth. They lent just enough money so it could keep paying creditors, while the ratio of its debt to gross domestic product soared.

At the core of the proposals under consideration are concessions by banks and other private bondholders to roll over maturing bonds and keep their money invested in Greece for years to come — lessening the country’s need for cash but likely causing a default declaration.

In comments before the meeting, leaders indicated they were looking for what German Chancellor Angela Merkel called a solution “at the root” — one that acknowledges Greece is not likely to grow fast enough or produce enough tax revenue to pay off the more than $400 billion it has borrowed. Many economists have argued that the country is insolvent and that programs to merely lend it more money without somehow cutting the overall debt are destined to fail.

That has been the strategy followed until now, with the International Monetary Fund and others insisting that Greece could be put back on track with some public loans and internal economic reform.

But as leaders gathered, the aim was to more deeply restructure Greece’s debts, finding ways to provide it money with lower interest rates, longer repayment terms and a break on the total amount owed — much like a homeowner rewriting an underwater mortgage.