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Greek debt deal won't save Europe's hide

(MoneyWatch) COMMENTARY One day before a deadline to nail down an agreement to restructure Greece's sovereign debt, more than half of Greek bondholders say they will agree to the deal. Although that will help the country avoid being forced into an "involuntarily" default, the bond swap does little for average Greeks or to solve Europe's debt crisis.

By one count, 58 percent of investors holding Greek bonds have indicated they will accept the offer to exchange their current debt for bonds that will pay about 53 percent over a longer maturity period. If three-fourths of bondholders approve the deal, then the pact will be judged to be "voluntary." That will bar investors from collecting on credit insurance they had taken out on Greek debt.

Still, grave doubts remain over whether the swap will prove decisive in halting the eurozone's slide into a regional debt crisis, as some proponents of the agreement contend. Absent the deal, Greece's debt is projected to rise to164 percent of GDP by 2020. With it, the nation will owe 120 percent of GDP by that time. And that is the best-case scenario, assuming that the Greek economy turns around soon.

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For now, however, the picture looks bleak. As of the end of 2011, Greece's economy was shrinking at 7 percent annually. The country's debt amounts to 133 percent of its roughly $305 billion GDP. More than a fifth of its workforce is unemployed, and the little capital left in the country is fleeing faster than advertisers dumping Rush Limbaugh.

What the deal does accomplish is take the threat of a disorderly Greek default off the table -- for now, or at least as long as the EU's solvent members are willing to foot the bill for the bailout. In other words, Greece's fiscal fate effectively lies in the hands of German voters. Greek citizens could also push the country toward a default when the country holds national elections this spring by installing a government that opposes the current swap terms.

Even if the agreement goes off without a hitch, this deal still amounts to putting out a fire in one room of a rapidly burning building. Greece isn't the only bankrupt nation in the EU, after all -- Spain and Portugal are also insolvent. For instance, the Spanish government has already said it won't meet its deficit-cutting goals for the year. As of January, the country's industrial output was down 4.2 percent from the previous year, which represents significant deterioration over the 3.5 percent contraction seen in December.

Soon, someone is going to have pay to have all these dead mice removed from the EU's kitchen floor.

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