EUROPE'S handling of its sovereign-debt crisis has been disastrous. Euro-zone leaders succeeded in turning a manageable economic problem in Greece into a political conundrum that jeopardises the single currency. A premature insistence that private-sector creditors take a hit on Greece has fostered contagion. Massive write-offs are necessary but nobody yet knows what constitutes sustainable debt or what Greece's "real" GDP is. In Latin America in the 1990s debt relief was granted only when fiscal adjustment and structural reforms were very advanced. This is certainly not the case in Greece. Although the European Central Bank's three-year liquidity operations and the probable provision of more bail-out money for Athens provide a breathing space for a more comprehensive solution, Greece will remain a source of uncertainty. The country is in a deep recession: its GDP has fallen and unemployment has risen for three consecutive years. More austerity will only increase economic and social pressures within the country.
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