One way or another, the governments and other official lenders that have bailed out Greece and now hold its debt are going to lose some or all of that money. They can let it go now, by providing Greece with debt relief, or they can lose it later -- possibly as part of a disorderly Greek default and exit from the euro area.

Their failure to recognize this binary choice was on display again Nov. 12, when finance ministers from the 17-nation euro area put off until later this month a decision to release the next 31.3 billion-euro tranche of bailout funds, leaving Greece to figure out how to roll over a 5 billion-euro debt payment this week.

Instead of confronting Greece’s debt problem head-on, the finance ministers sought to give the government two more years -- until 2022 -- to get its debt burden down to the target of 120 percent of gross domestic product. Once they’ve figured out how to pay for Greece’s extra time, projected to cost 32.6 billion euros, the euro leaders will no doubt declare victory. They’ll pretend that they haven’t just approved yet another bailout, and that a return to solvency is within Greece’s financial and political ability to achieve.

No wonder the International Monetary Fund’s general director Christine Lagarde rolled her eyes at a post-meeting news conference. She insisted on sticking to the current 2020 target date, and she was right: Europe’s leaders must have a more realistic debate now on what a Greek rescue will take, and not just for the sake of the IMF’s integrity. Waiting, if that’s the plan, until after German elections in 2013 would probably be too late for Greece and possibly for the euro.

A leaked draft review of the Greek bailout by the so-called troika of official creditors -- the IMF, the European Commission and the European Central Bank -- underscores the urgent need to stop pretending and give Greeks and investors reason to believe in the program’s eventual success. The assessment warns that “risks to the program remain very large” -- primarily due to the Greek government’s weakness and the threat that continued lack of confidence in its ability to emerge from under its debt pile will make failure self-fulfilling.

Perceptions in northern Europe that make it harder to spend more money on the bailout are also self-reinforcing. Greek governments have been feckless in the extreme, but as the European commissioner for finance, Olli Rehn, said this week, “It is time to debunk the perception that no progress has been made. This perception is damaging, it is unfair, and it is simply wrong.”

Greek Prime Minister Antonis Samaras, for all his previous sins in blocking early reforms, last week took enormous political risks to satisfy the troika’s demands. The effort nearly collapsed his coalition government and prompted violent protests in the streets.

Consider the scale of the pain that Greece has already suffered. Amid a Depression-scale economic contraction, the government has cut spending and raised taxes by a total of about 13 percent of gross domestic product since 2009. That’s more than the 10 percent target the troika had set for 2010-2014, and roughly twice the size of the feared U.S. fiscal cliff. The new cuts that Greece’s government pushed through last week should amount to a further 5 percent of GDP over the next two years.

Budget cuts have fallen primarily on public-sector salaries, pensions, health care and -- in a country that’s deeply sensitive over territorial disputes with Turkey -- defense. Public expenditure on health, for example, dropped by 25 percent and is now scheduled to fall by a similar amount over the next two years.

There are good reasons for many of the cuts. Greek public- sector wages and pensions rose unsustainably before the crisis and now need to come back to earth. Pharmaceutical prices in Greece were outlandishly high. But the pain is undeniable, and it’s nothing short of amazing that Greece’s government has agreed to more of it. With more than half of all young people unemployed, and the government forecasting that the economy will shrink by a further 4.5 percent next year, it is hard to imagine Greeks carrying through with the cuts and societal transformation demanded unless they can see a believable path to recovery. If Europe’s leaders refuse to consider the only solution likely to work -- a debt writedown -- they will have nobody but themselves to blame if they lose their money to a default.

[Bloomberg]