Greek deal to cut spending does not end debt drama

FRANKFURT — More than two years after it came clean about its addiction to debt, Greece may finally have begun its long and painful road to recovery.

Greece's fractious political leaders struck a deal Thursday to make deep cuts in government jobs and spending to help save the country from a default that could shock the world financial system.

The deal, under negotiation since July, is one of two critical steps Greece must take to receive a $170 billion bailout from other countries in Europe and around the globe. It was announced by Greek Prime Minister Lucas Papademos' office and will be scrutinized during talks in Brussels between finance ministers from the 17 countries that use the euro.

German Finance Minister Wolfgang Schaeuble said no final agreement unleashing the bailout money would be reached Thursday. He said more work had to be done to fulfill the conditions for a bailout.

In addition to the fiscal austerity mandated by the European Union, the European Central Bank and the International Monetary Fund, Greece is close to an agreement with private investors who hold nearly two-thirds of its debt to sharply reduce the country's borrowing costs.

Greece needs the bailout by March 20 so it will have enough money to redeem $19.2 billion worth of bonds coming due. If it doesn't make that payment, it will be in default. Financial analysts fear that could set off a chain reaction similar to the financial meltdown triggered by the collapse of investment bank Lehman Brothers in the fall of 2008.

The bailout will ease some of the uncertainty that has unsettled Europe and the world financial system for more than two years, but it will not bring down the curtain on Greece's debt drama.

Greece remains in a deep recession. Unemployment is 20.9 percent after the economy's fifth straight year of decline. Its government finances and its economy are being dragged down by costly political patronage, tax evasion and special protections for some favored trades.

Greece will be struggling to pay its debts for years, says Domenico Lombardi, senior fellow at the Brookings Institution. "The scope of the problems that have to be tackled in Greece are so huge and so entrenched," he says.

Efforts to fix those fundamental problems, at the behest of Greece's increasingly exasperated creditors — including prosperous Germany — are moving slowly, if at all. If they are not solved, Greece may find itself back at the edge of default.