Ben Chu: Nation takes its medicine – but condition may worsen

The Greek Godot finally arrived. After an interminable wait, the deal has, at last, been done. The government of Prime Minister Lucas Papademos will make further budgets cuts, equal to 1.5 per cent of GDP this year. This opens the way for the Greek private-sector bondholders to accept their "haircut", giving Athens around €100 billion in debt relief. This shared public- and private-sector sacrifice will unlock the €130bn aid package for Athens from the European Union and the International Monetary Fund. Now Greece should be able to make its €14.4bn bond redemption payment on 20 March. The risk of a disorderly default next month, which could set off a broader financial cataclysm, has receded.

Will there be a sharp recovery of confidence in the markets in response? There wasn't much sign of it yesterday. A Greek deal had been pretty much "priced in" by investors, meaning there is unlikely to be any impressive rally from financial markets. And fears of financial contagion from Greece to other weak eurozone states had already eased thanks to the €500bn injection of liquidity into the eurozone banking system by the European Central Bank last month. There is also due to be a further blast from the ECB's liquidity "bazooka" at the end of the month.

So crisis over? Even with the debt writedown and new aid, Greece will be left on course for a debt pile worth more than 120 per cent of the country's annual output by the end of the decade. "This is woefully insufficient as far as putting Greece's public finances on a sustainable footing," warns Nicholas Spiro, of Spiro Sovereign Strategy.

Many are sceptical over whether the country will make it to 2020 without mishap. Greece needs growth to have any hope of paying its debts. Yet the Greek economy is still in freefall, with a 2.8 per cent contraction pencilled in by the European Commission for 2012. Germany is insisting on a policy of draconian austerity from Athens, which has only deepened the depression. Unless the medicine suddenly starts working, Greece is inevitably going to need still more debt forgiveness. And that will mean more losses for private bondholders – or more financial support from other European governments.

A Greek exit from the eurozone looks less of a risk today, but it has not disappeared. Many analysts still put the chances at around 50 per cent. Life within the single currency looks agonisingly difficult for Greece. It needs to bring its labour costs into line with ultra-efficient Germany through grinding price deflation and a decade of squeezed living standards. But the shock of exit could be more traumatic still. Most Greek savers would pull their money from the banking sector at the first hint of a withdrawal, to prevent a massive reduction in their real wealth from devaluation. Financial and economic chaos would most probably follow. And for what benefit? Some economists argue that talk of an export boost from the reintroduction of a significantly devalued drachma is impossibly optimistic for an economy like Greece.

But Greek politics is a wildcard. The country is due to hold elections in April. A new government, under popular pressure, might decide not to honour the deficit reduction promises, prompting a fresh confrontation with the rest of Europe. A new administration might even decide to head for the exit. Desperate countries do desperate things.

European bigwigs are not exactly making Greece feel welcome. The Dutch EU Commissioner, Neelie Kroes, said this week that the single currency could survive without its troubled member. And Berlin is pushing for the financial aid to pass through a special bank account, which the Greek state will not be able to tap, from which debt interest payments would be deducted. That might be interpreted as a humiliation too far by Athens.

The agreement to release the new bailout cash must also be approved by the Bundestag. It is not just Greek politicians that need to sign up to this deal, but German ones too. The agonised wait is over. Let the agonised waiting begin.