Draghi can lead ECB to Greece's rescue

Frankfurt: European Central Bank President Mario Draghi has taken a decidedly more activist and creative approach than his predecessor, Jean-Claude Trichet, toward supporting the euro-area economy. Now he has an opportunity to take the initiative with Greece.

If all goes as planned, Greece will get as much as €100 billion (Dh487.45 billion) in debt relief from private creditors, and €130 billion in loans from the European Union and the International Monetary Fund to help cover its borrowing needs while it carries out austerity measures. The stated goal: to lower the government's net debt burden of more than 150 per cent of gross domestic product to 120 per cent of GDP by 2020 — a level that would still leave it among the euro area's most indebted.

Greece's end of the bargain is extremely onerous. The government must reduce its annual primary budget deficit by about 7 per cent of GDP, or more than €15 billion — the equivalent of what it spends every year on social programmes.

Official creditors, such as the European Union and the ECB, have the power to increase Greece's chances of pulling through. They hold about 40 per cent of the country's sovereign debt. If they agreed to take losses alongside private creditors, Greece's net debt burden could be brought down to roughly 80 per cent of GDP immediately.

Here is where Draghi comes in.

By various estimates, the ECB holds between €36 billion and €55 billion of Greek debt, much of it purchased on the open market at a deep discount to face value. According to Bloomberg News, euro-area officials have said the ECB is considering ways to give Greece a break on that debt, possibly in a deal that would involve selling it at cost to the European Financial Stability Facility.

It would also permit the ECB to avoid losses that could otherwise undermine its ability to keep buying the bonds of other troubled countries such as Spain and Italy. Action from the ECB would be only a first step. European leaders, in particular German Chancellor Angela Merkel, must stop demanding further unreasonable austerity measures. That approach carries a big risk of pushing Greece — and possibly the global economy — straight off a cliff.