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The Corner

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Are We There Yet?



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Are we there yet? Nope.

Writing in City AM, Open Europe’s Raoul Ruparel surveys the successful  (but keep an eye on the bonds that are not governed by Greek law: that’s a different story) Greek cram down default bond swap and, as usual, declines to drink the Kool-Aid, despite the added ouzo:

[T]he Greek banking sector will need to be recapitalised since its capital base, consisting largely of Greek bonds, will be depleted. The troika publicly says this will cost €23bn (£19.3bn). However, our estimates, and those in a recently-leaked troika debt sustainability analysis (DSA), put the figure closer to €50bn. After this deal, questions over the health of the Greek banking sector will abound.

Most importantly though, even if the 95 per cent participation rate [in the Greek law bond swap] is met and the banks are returned to some semblance of stability, this is still a terrible deal for both Greece and Eurozone taxpayers. It has sown the seeds of a major political and economic crisis at the heart of Europe, further threatening the stability of the Eurozone.

This would, perhaps, have been acceptable were it not for one nagging detail: this plan will not save Greece.

Of the total €282.2bn currently on offer to rescue the stricken country – through the bailouts and various forms of ECB and central bank intervention – Greece will only receive €159.5bn, or 57 per cent. The rest will go to banks and other bondholders to cushion the blow of the complex PSI [the bond swap] scheme. In fact, to gain the €100bn writedown from private bondholders, Greece will have to take on an additional €86bn in debt – giving a small amount of debt relief, most of which is spread well into the future. Following the restructuring, Greece’s debt-to-GDP ratio will still be 161 per cent, a reduction of only 2 per cent compared to current levels, and Athens will almost certainly continue to miss its debt and deficit targets over the next few years.

Under the proposals, the total level of budget cuts Greece is expected to undergo stands at 20 per cent of GDP by 2013. The cuts are deeper and faster than any country has attempted – successfully or otherwise – in living memory. For example, the extensive fiscal consolidation seen in Ireland during the 1980s and 1990s totalled 10.6 per cent. Unlike Ireland’s task, Greece does not have the option of currency devaluation, meaning that the whole adjustment burden will fall on the Greek population (via internal devaluation). The latest figures put total unemployment at 21 per cent, with youth unemployment at 51 per cent – that is before Greece has even come close to finishing its fiscal consolidation and structural reform. Further increases in unemployment are a certainty, but it is far from clear what the resulting negative social and economic impacts will be.

Looking at these figures, it is clear that Greece will inevitably need either another bailout or be forced to default on its outstanding debt. But here’s the kicker: in a few years’ time, there will barely be any banks or other bondholders left to foot the bill from a Greek default. It will fall almost entirely on taxpayers.

At the start of this year, 36 per cent of Greece’s debt was held by taxpayer-backed institutions (ECB, IMF, EFSF). By 2015, following the PSI and the second bailout, the share could increase to as much as 85 per cent, meaning that Greece’s debt will be overwhelmingly owned by Eurozone taxpayers.

These facts point to one painful conclusion: Europe is probably on course for a major political shock. Taxpayers in Germany, Finland and the Netherlands will not take kindly to having to pay (and see their debt and deficits increase), as Greek loan guarantees are turned into Greek losses. The Greek people will feel cheated that they suffered years of tough austerity only to see the country hit the iceberg anyway. This combination of ill-feeling and injustice will surely set the scene for another political and economic crisis which could run right to the core of the Eurozone.

And then there’s Portugal. And Spain. And…

Tick tock.



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