We’ve argued before that the second Greek bailout does not present a realistic long-term debt sustainability plan for Greece.
However, a deeper dive into the numbers here shows just how pitiful the bailout really is—not only for Greece but for eurozone taxpayers.
Think tank Open Europe’s Raoul Ruparel takes a look at the data in a note out this morning:
Debt is largely passed on from one group to another meaning that firstly, the actual level of reduction is minimal (see above) and secondly, a huge chunk of Greece’s debt will gradually end up in the hands of eurozone taxpayers.
At the start of this year Greek debt amounted to around €355bn (163% of GDP). Of this 36%, was held by taxpayer-backed institutions (EU/ECB/IMF – official sector).
Following the voluntary Greek restructuring and the second Greek bailout (around summer 2012) this is likely to change significantly. We expect that a huge 62% of Greek debt will be held by taxpayer backed institutions.
And by 2015, when all the installments from the first and second bailout have been paid out, official sector lending could account for as much as 85% of Greek debt, meaning that only 15% of Greece’s debt will not be underwritten by eurozone taxpayers.
Greece will probably need another bailout or default anyway: As is now widely acknowledged, even following this bailout and restructuring, another Greek default looks inevitable – the combination of a huge debt burden and poor growth prospects mean Greece will not be able to return to the markets to raise funding for the foreseeable future.
Therefore, as the DSA admitted, Greece is likely to need at least €50bn to avoid a disorderly default in the second half of this decade. Given that in 2015 only 15% of debt will likely remain in the hands of the private sector, another €50bn of taxpayer-backed debt could mean that nearly 100% of Greek debt is owned by the official sector.
Hugely increased cost to taxpayers of a future default: This also means that if Greece were to default in 2015, after the second bailout runs dry, a huge share of the cost would fall on eurozone taxpayers, while any remaining private sector creditors would be almost completely wiped out.
Given that the existing bailouts – which have involved loan guarantees rather than up-front cash – have caused so much resistance already, there could be massive political fallout in countries such as Finland, the Netherlands and Germany, when taxpayers realise that they will never see the cash they lent Greece ever again.
So essentially, Greece is only actually getting rid of about €4 billion in debts ($5.3 billion) in debt (regardless of who owns it) even as it subjects itself to years of austerity. And at the same time, an expected second restructuring will hit taxpayers—and not the private sector—the hardest.
The only way this makes sense is if EU leaders are trying to dull the pain ahead of another probable Greek restructuring, acknowledging that taxpayers are likely to take another hit but staving off the shock of a single, whirlwind default from Greece. Amid deteriorating support for the country from Germany, Finland, and other countries in the European core, this remains quite the gamble.
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