RELIEF at Greece's fresh bailout package, which has averted the threat of a catastrophic default by Athens next month, was undermined yesterday by growing doubts about the sustainability of the agreement.
The Greek Prime Minister, Lucas Papademos, called it an "historic day" after the AU$130 billion deal was concluded early on Tuesday.
European finance ministers said in a statement that it provides a "comprehensive blueprint" for putting Athens' public finances on a sustainable footing by reducing the country's debt to GDP ratio to 120.5 per cent by 2020. But some financial analysts have already suggested that the deal will unravel long before then.
"Greece is caught up in a full-blown debt spiral and no one has any certainty over what happens to GDP growth a quarter from now, let alone a decade out," said David Owen of the US investment bank, Jefferies.
"More likely than not, and not necessarily of its own making, at some point, events will blow the country off course."
That pessimistic view was reinforced by a confidential document on Greece, compiled by European and International Monetary Fund economic analysts, that was leaked on Monday night.
The secret report showed that Greece's debt burden could easily still stagnate at an unsustainable 160 per cent of GDP at the end of the decade if the economy does not return to growth quickly.
Analysts also expressed doubts over whether the Greek government would be capable of delivering the austerity measures that have been demanded by Greece's European creditors in exchange for the new bailout funds.
Chris Towner from currency specialist HiFX said: "The reality of spending cuts will not go away for decades. The Greek people may take their destiny into their own hands through the democratic process."
Greece is due to hold new parliamentary elections in April
Support for the two main parties in the coalition that have backed the austerity measures - New Democracy and Pasok - hit an all-time low this week.
The deal signing off on Greece's new bailout was agreed after 14 hours of intense negotiations between finance ministers. The country's private sector bondholders will take a larger than expected 53 per cent write down on the value of the investments, giving Athens around AU$107 billion in debt relief.
The European Central Bank will forgo the profits on its holdings of Greek bonds and send them to Athens, which should ease Greece's debt burden by around AU$15 billion. National central banks will also make a contribution through sending any profits on their own holdings of Greek bonds to Athens. The interest rate that Greece pays on its loans from the European bailout fund, the European Financial Stability Facility, will also be cut.
For its part, Athens will push through further spending cuts of AU$3.3 billion in 2012, amounting to 1.5 per cent of annual GDP. Greece will also be required to establish a special account, which will set aside the funds that the country needs to pay its creditors every three months. The country has also pledged to create a new law that will prioritise repayments to creditors above spending on social services.
Greece will also accept an "enhanced and permanent" presence on the ground of European Commission inspectors, who will monitor whether the government is delivering on its fiscal commitments.
Deal still needs to be ratified by national parliaments
A key test will be the German parliament, which is expected to vote on the package next week. Another hurdle is the agreement of private sector bondholders. It remains to be seen what proportion of them will accept the "voluntary" bond swap negotiated on their behalf by the banking lobby group, the Institute of International Finance.