Photo: Wikimedia Commons
Angela Merkel can say publicly that Germany won’t bail out Greece, but it really doesn’t matter.An implicit guarantee, which is what everyone presumes, can go a long way.
As long as European banks figure that Greece will be bailed out, they’ll probably keep buying Greek debt, especially with some marginally elevated yields.
That being said, on the medium-term the the problem isn’t solved, and no amount of implicit guarantee can solve it.
David P. Goldman breaks down the maths:
Greek bonds today traded at around 6.3%. With a total float of $402 billion, Greece’s annual debt service bill would be $26 billion if the whole debt were financed at this yield. That’s a bit over $6,500 a year in annual debt service for Greeks who actually have a job (4.95 million workforce minus the 20 per cent unemployed), or about 20% of per capital income of $32,500.
The problem is simple: increases taxes to reduce per capita income by 20% to pay for the existing level of debt (of course, the economy would collapse and the deficit would rise). It simply doesn’t add up.
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