European finance ministers agreed to extend more money to Greece yesterday, after the Greeks fulfilled their end of the bargain by passing a severe austerity and privatization package amid mass protests. The finance ministers extended the 8.7 billion euro ($12.6 billion) loan, which added to the 3.3 billion euro loan from the IMF will get Greece through borrowing and debt service for the rest of the summer. This money essentially passes through Greece on the way to European banks, who are the main creditors.

But the big lift is coming, with the other 80-90 billion euros promised in the rest of the package. This probably won’t be decided until early fall. But several banks have agreed to take writedowns of Greek debt in order to stave off a wider crisis.

In a statement, the board of the Institute of International Finance, representing more than 400 of the world’s largest banks, announced its intention to consider buy-backs of Greek government bonds “to lay the basis for a more sustainable debt position”.

Since market prices of Greek debt are far below their original sale prices, any buy-backs by the Greek authorities, European governments or other official purchasers that were at prices close to current market prices could provide significant debt relief to Greece.

The consequence would be for banks and insurance companies to take losses on the debt sold to new official creditors, reducing the total stock of debt owed by Greece and enhancing the sustainability of the country’s public finances.

Europe is actually looking for more help from the banks, a restructuring that would allow a rollover of Greek debt under more favorable terms. Not every major player has yet signed on to this, though French and German banks have been seen as receptive. The trick will be to effect this rollover without it being called a default event.

All of this is fairly premature, however. In the IIF statement, they said that the Eurozone nations and the IMF would have to fund the Greek financial system “until the benefits of steady progress under the reform programme would allow them banks to regain access to market funding.” I think we can say that under the current state of affairs that will never happen. The austerity package is destined to make the economy worse in Greece, not better. And the asset sales are poised to take in just a fraction of what’s been budgeted. What sales do take place only become profitable through a steady extraction of more funds out of the economy, making matters worse still.

What finance ministers promise today bears no resemblance to what they’ll be willing to promise 6-9 months from now, when Greece is just as indebted, when debt yields are just as unaffordable, and when there’s nothing left to cut. “The beatings will continue until morale improves” is not a worthwhile strategy if you’ve beaten every worker into submission without success.

They must have laughed the Polish finance minister out of the room. This is the last sentence in the NYT piece:

Speaking in Warsaw, Jacek Rostowski, the finance minister of Poland, emphasized the need to spur economic growth in Greece, in addition to cutting government spending.

Silly Rostowski.

UPDATE: The European Commission’s probably-optimistic report shows -3.75% growth for Greece in 2011, and basically zero growth for 2012. I’m sure that will do wonders for the deficit!