European governments have left themselves with an enormous agenda for June to keep in check a gathering debt crisis that they have so far failed to quell.
Having postponed big decisions at their March summit about the shape of the euro zone's present and future bailout funds until this month, European leaders now face big decisions about how to prevent an imminent Greek payments crisis. Also on the agenda: Ireland, and details of the so-called six-pack of economic changes designed to provide a boost to the euro zone's economic laggards.
Governments have kicked so many cans down the road that there is "a big risk of significant under-delivery," says Sony Kapoor, head of Re-Define, a financial think-tank.
Three months ago, what is now the most immediate crisis, Greece, was hardly on the agenda. It was widely understood that last year's €110 billion ($158 billion) bailout wouldn't be enough to tide it through next year as originally planned because there was almost no chance of private investors returning to buy Greek bonds.
It was pushed to the front burner only by the International Monetary Fund, which reminded its fellow lenders that it needed to be sure there would be guaranteed financing for the following 12 months.
ithout that guarantee, the IMF said it couldn't pay out the next slice of bailout money this month, without which Athens is set to run out of cash by mid-July.
Hence, a second Greek bailout, and a fight over burden sharing. That's the debate over how much of the expected €65 billion shortfall for 2012 and 2013 should be provided by other governments, how much from Athens, and how much, if any, from private bondholders agreeing to accept delayed repayment when their bonds mature.
That third leg—private-sector involvement—has been the most troublesome part. Germany's finance ministry, with no fewer than three committees of the German parliament breathing down its neck, is insisting bondholders take their share. The European Central Bank has vociferously opposed most means of achieving this.
Nonetheless, with Greek Prime Minister George Papandreou heading to Luxembourg Friday to talk to the Grand Duchy's Premier Jean-Claude Juncker, who chairs the group of euro-zone finance ministers, the market assumption is that a deal will be done.
Best guesses suggest roughly half will be covered by new bailout money mainly from the European Financial Stability Facility, the current bailout fund. Greece's existing bailout predates the EFSF and uses bilateral loans from other euro-zone economies. The advantage of using the EFSF for a second bailout is that, unlike bilateral loans, it wouldn't require parliamentary approval in places like Germany, where it's mighty unpopular.
Of the remaining €30 billion to €35 billion, perhaps half could come from privatizations and out of the Greek budget, leaving €15 billion to €20 billion to be obtained from the private sector through "voluntary" repayment deferrals by bondholders.
European officials have been talking about how they might encourage such deferrals, including through providing "preferred" status to those who agree to defer, protecting them somewhat against the prospect of future losses—but they've also homed in on Greek banks as the most persuadable holders of Greek bonds.
Analyst Nicola Mai of J.P. Morgan says that if the maturities of the €65 billion of Greek government bonds held by Greek banks are evenly distributed and the banks agree to defer their maturities, they could account for €13 billion of the 2012-2013 financing gap. Nearly there.
Yet, most analysts think Greece will return to haunt the euro zone, one way or another. Even if the second bailout carries it to 2014, the question is what will happen then: a forced restructuring of private bondholders, with the risks of contagion and a new leg of the crisis, or more official financial support, which will make Greece a ward of Germany and its friends?
And there is another Greek narrative that will have to be watched: the banks. A slow decline in Greek bank deposits is under way that further declines in economic confidence could accelerate. Is the ECB ready to stand behind its banks indefinitely?
The second bailout and the host of other decisions are scheduled to be decided by the summit of June 24 by way of a long-scheduled finance ministers' meeting in Luxembourg on June 20—and possibly an impromptu one on June 14.
Some of the other decisions are less urgent. The six-pack may marginally help reduce the chances of the next debt crisis, but not do much for this one. Fixing the European Stability Mechanism and boosting the lending power of the EFSF from the current €200 billion-plus could be put off again, though it wouldn't look good.
The crowding together of these decisions is more evidence to some observers of how ill-equipped the euro-zone's political structures are for the challenges that confront it.
ECB President Jean-Claude Trichet, appears to agree, judging from his speech on Thursday urging the creation of a European finance ministry. But if this month's decisions—modest by comparison—are so politically fraught, what price the unity that the survival of the euro zone with 17 members appears to demand?
Tough Decisions on Europe's June Agenda
European Financial Stability Facility
European Stability Mechanism
Main obstacle: Differences over how to fund, private sector 'participation and preferred creditor status