Monday, April 12, 2010

Support Package for Greece

After a few weeks of uncertainty details of the financial support package for beleaguered Greece were finally announced yesterday with more details here.  Ireland will be providing about 1.5% of the total relief, or €450 million out of a total of €30 billion to be made available from the EU, on which Greece will pay an interest rate of around 5%.  The International Monetary Fund are also making about €15 billion available.

Given some of the points we have been making here and here it seems a bit absurd that Ireland should be part of a rescue deal for Greece.

Of course, we don’t have €450 million.  We’re broke.  If (and more likely when) Greece has to turn to this rescue package we will have to borrow this money so Greece can borrow it off us.  Some have suggested that if our borrowing costs are less than 5% we could even make a profit on this bailout.  There are some who were even saying the same about NAMA!

Why will Greece turn to this support?  Even after dropping about 1% from the 7.5% yields of last week, markets still expect to be compensated for taking on the risk of Greek debt.

From today’s RTE report on the Greek crisis:

Meanwhile, the interest rates which Greece must offer to attract loans dropped sharply today.

The rate, or yield, on Greek 10-year debt bonds fell to 6.62% this afternoon from 7.126% on Friday. This remains an exceptionally high rate for a member of the euro zone but is far below the the level of slightly more than 7.5% reached last Thursday when concern that Greece might partly default was running high.

The rate had dropped to 7.126% on Friday after the European Union had said it stood ready to help if asked. The high point reached on Thursday was the highest for any euro zone country since the euro was created.

If Greece went to the markets to refinance their debts they would have to pay something north of 6% to raise the money.  If they fail to do so from bond markets they can fall back on the EU’s €30 billion at a rate of 5%.

Peter Boone and Simon Johnson are clear in what they think will happen

Often assistance packages of this nature just help “smart money” to get out ahead of a default.  This could be the case here; 40-45 billion euro total money could last roughly one year.  Both Russia and Argentina got large packages in the late 1990s but never regained access to private markets, so eventually everything fell apart.

Sunday’s package should make it possible for Greece to borrow short-term but it takes courage to lend for 5 or 10 years to the Greeks unless there is much more fundamental change.

The same two authors have a much longer piece here. Towards the end of this piece there is the following footnote:

(Some people suggest Ireland is an example – however Ireland started with much lower debt levels, and despite large fiscal cuts they are still running a deficit over 10% of GDP that requires annual financing and a rapid build-up of sovereign debt.  Greece could not get these funds in markets, and they will have trouble repaying that new debt just like the old.)

Other believe in us!  On Friday a piece was posted to the BBC website advocating some Irish Lessons for the UK with a previous piece from The Telegraph on What Ireland can Teach us about Spending Cuts.

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