Despite Pact, Unease Lingers for Greece

By Stephen Fidler

No triumphalism accompanied Greece's bailout and debt-restructuring deal hammered out early Tuesday; the euro zone's two-year debt crisis has seen too many false dawns. Financial markets were somewhat cheered that months of negotiations aimed at cutting Greece's heavy debt had reached a resolution, largely putting to rest fears of a chaotic debt default next month. It also removed—at least for the immediate future—the gnawing anxiety that some policy makers in Germany and elsewhere are trying to oust Greece from the euro.

But the overriding reaction was of unease that this tough deal, which has already generated huge opposition among Greeks, is bound to fail. Many observers ask not if the program will fall apart, but when.

Euro-zone finance ministers on Tuesday forged a €130 billion ($171.9 billion) rescue deal that will see Greece's private creditors cut the face value of their bonds by 53.5% in a swap that will reduce the country's outstanding debt by €107 billion.

The deal will still leave Greece, in the best case, with a huge debt burden and enormous challenges to implement. "We've seen Greece derailing several times in the last two years," Dutch Finance Minister Jan Kees de Jager said Tuesday. "Implementation risks are very high in the case of Greece.

"Tuesday's agreement isn't quite the end of Greece's near-term debt concerns. Private investors will be asked to tender their old bonds for new, which will force some to crystallize losses of perhaps three-quarters of their investments.

If enough bondholders don't agree—the agreement assumes 95% participation—holdouts will be forced into the bond swap, a process that in past sovereign restructurings has generated multiple lawsuits. In Athens, a new law was unveiled Tuesday that could be invoked to strong-arm holdouts.

The money to finance the plan—and the €30 billion in high-quality bonds being offered to entice investors into the swap—will also need to be voted through euro-zone member parliaments, so the swap can be completed before a €14.5 billion bond repayment comes due on March 20.

But it wasn't this short-term uncertainty but the downbeat debt assessment from the International Monetary Fund accompanying the agreement that tempered enthusiasm for the accord.

The balance of risks in this "accident-prone" economic program is "mostly tilted to the downside," the IMF said, adding even a small shock could see the country's debt growing "on an ever-increasing trajectory."

On Tuesday morning, private and official lenders to Greece made extra concessions that should bring down Greece's debts from the levels cited in the report. But that didn't soften criticism that even a glum IMF assessment lacked credibility. Sony Kapoor, managing director of Re-Define, a financial think tank, said the IMF had engaged in "arithmetical gymnastics" to produce the assumptions to get Greece's debt target down to the targeted 120.5% of gross domestic product by 2020—a level many analysts still consider too high. Greek government debt now stands at more than 164%.

On growth, the IMF's base case assumes Greece, now entering its fifth year of recession, won't grow this year—and for the next seven years grows at an average 2.6%, an estimate many economists say stretches credulity. But a worse growth case—still optimistic compared with many private forecasts—pushes the numbers way off course: leaving debt at 159% of GDP by 2020, way above levels normally considered manageable.

The program wasn't vulnerable only to slower growth, the IMF said: Smaller privatization receipts, higher interest rates than assumed, or a worse budget performance would all make the target unreachable.

The trouble, the IMF admits, is that Greece is being asked to cut its debt burden compared with the size of its economy at the same time it is pursuing an internal devaluation—reductions of wages and other costs to make its economy more competitive—that will inevitably shrink the economy further. Meanwhile, improving competitiveness and boosting exports will be a slow process, given Greece's small export-oriented industrial base.

Then, there are questions about the will of a new Greek government, under its likely leader Antonis Samaras after elections in April, and the patience of its official lenders. Greece, closed out of the financial markets probably for the rest of the decade, will still depend on life-support from its fellows in the euro zone until the decade is up and possibly beyond.

That suggests concerns about a Greek departure from the currency union could re-emerge, even this year.

Some analysts worry that the euro zone's political masters have been made complacent by how the European Central Bank has taken pressure off the region's financial markets by flooding the region's banks since December with cheap three-year money. Since that offer to banks in December—to be followed by another next week—interest rates on the bonds of Italy and Spain have fallen sharply.

Some economists, meanwhile, say Greece is an extreme case, but not alone, and the main worries for the euro zone's future may be as much economic and political as financial. "While Greece is in a worse shape than any other euro-area country, the austerity-driven deep recession, collapse of business and consumer confidence, testing of the social fabric and dysfunctional politics seen there could all rear their ugly heads elsewhere," said Mr. Kapoor of Re-Define.

—Geoffrey T. Smith, Ainsley Thomson and Costas Paris contributed to this article.

Write to Stephen Fidler at stephen.fidler@wsj.com