Greece got the rescue. But it's the rest of Europe that's breathing easier.
A $172 billion (euro130 billion) bailout isn't likely to keep Greece from eventually defaulting on its debts and abandoning the euro, many economists say.
The sad truth about the bailout is that it mostly just buys time. The breather allows European governments and banks to strengthen their financial defenses, leaving them less vulnerable if Greece cracks up a few months or even a few years from now.
The bailout _ plus an agreement endorsed Thursday by most private lenders to reduce Greece's debts _ "does more to protect Europe from Greece than for Greece itself," says Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics.
A similar approach worked a decade ago. When Argentina ran into trouble in 2002, stopgap bailouts gave financial markets time to prepare for an almost-inevitable default.
Without its bailout, Greece would have missed a March 20 bond payment and plunged into chaos, perhaps taking Europe's financial system with it. It was the second time Greece had to be rescued. It got an initial $146 billion (euro110 billion) bailout in 2010.
For the rest of Europe, the reprieve means:
_The eurozone can roll out a permanent bailout fund, the European Stability Mechanism. Europeans are squabbling over whether to raise the fund's overall lending capacity to as much as $1 trillion (euro755 billion). The capacity is now $650 billion (euro500 billion). But around $240 billion (euro180 billion) of that has already been committed to Greece, Ireland and Portugal. That leaves too little to help large struggling economies like Italy and Spain.
_ Banks can raise more capital _ their financial cushion against losses. The European Banking Authority has said European banks must raise $152 billion (euro115 billion) in capital. They need the protection if a Greece default slashes the value of their holdings of European government bonds, blowing a big hole in their finances.
_The European Central Bank can keep flooding Europe's banking system more cash if necessary. Since December, the ECB has provided banks with just over euro1 trillion ($1.35 billion) in low-interest, three-year loans.
Under the bailout deal approved by eurozone finance ministers last month, Greece agreed to accept another bitter dose of austerity. It slashed the minimum wage and laid off 15,000 government workers, among other steps, in return for a $172 billion (euro130 billion) rescue from eurozone countries and the International Monetary Fund. Greece also reached a deal that would reduce what it owes banks, pension funds and other private investors by up to $142 billion (euro107 billion). On Thursday, Greece's private lenders overwhelmingly agreed to go along with the write-down.
But the rescue might not work. A Feb. 15 report prepared for European and IMF officials concluded that there's significant risk that Greece will miss its debt-reduction targets and need another bailout. The austerity measures meant to reduce Greece's debts could backfire by pushing the country deeper into recession and making it harder for the Greek government to raise the tax revenue needed to meet bond payments.
The Greek public is already rebelling against draconian austerity measures. Greek politicians, facing riots in the streets and an election this spring, might balk at its budget-cutting commitments and demand easier terms.
"The real crunch time is going to be September or October by which time we will know whether the new Greek government formed after the election will be able implement the new program," Kirkegaard says.
The fear is that a meltdown in Greece might panic banks into refusing to lend to each other, drying up credit to businesses, and scare bond investors into dumping Portuguese, Italian and Spanish bonds. As they sold the bonds, the interest rates on them would rise, driving those countries' borrowing costs up _ possibly to unsustainable levels.
Knowing that, the new European Stability Mechanism provides a "pot of money to throw at the problem" and restore calm, Kirkegaard says.
The easy money from the European Central Bank has already gone a long way toward easing fears of a financial calamity like the one that overtook global markets after the collapse of Lehman Bros. in September 2008. The ECB loans to banks ended a credit crunch: Banks, worried about the potential fallout from a default by Greece or another European country, were reluctant to lend each other money. The banks used some of the cheap loans to buy Spanish and Italian bonds, pushing down interest rates and easing the financial pressure on those countries.
"The ECB is saying, `The banks have our unlimited support,'" says Kristin Forbes, professor of global economics at the Massachusetts Institute of Technology. "This is the most powerful firewall that has been built yet."
The danger a Greek default poses to Europe is already less than it was, and it will be diminished further by fall as the new defenses go up. Private lenders have already absorbed losses. "The contagion risk from Greece," Kirkegaard says, "will drop dramatically."
The Argentine experience offers reason for optimism. MIT's Forbes, a former White House economic adviser, says creditors offered "a couple more bailouts than they should have" before the Argentine government stopped paying its bills in 2002. Argentina also had the advantage of owning its own currency.
That meant it could stimulate its economy by letting its currency fall in value, making its exports more competitive in foreign markets. Eurozone countries do not have that luxury.
The bailouts didn't stop a default _ but the delay gave financial markets time to prepare. As a result, Forbes says, "the contagion from Argentina" was minimal.