Each Eurozone Household Will Guarantee €1,450 Of Greek Debt By 2014

Tyler Durden's picture

Open Europe has released a paper titled "Abandon Ship: Time to stop bailing out Greece?" which recaps all the salient points well-known to everyone on why continuing to bailout Greece is the worst possible decision available to Europe, yet which will come over and over simply to prevent the European banking oligarchy from encountering an Event of Actual Loss (as defined by Encyclopedia Britannica). "Considering Greece’s poor growth prospects and increasing debt burden, the country is likely to default within the next few years, even if it gets some breathing space through a second bail-out. EU leaders should instead be planning for how such a default could be managed in as orderly a manner possible." Yet the main reason why European taxpayers should be concerned about the happenings in Athens, which are nothing but the latest in a now endless series of taxpayer to banker capital transfers, is that as Open Europe says by 2014, almost two-thirds of Greek debt will be taxpayer-owned! "via the bail-outs, so-called official sector (taxpayer-backed) loans are gradually replacing private sector loans. We estimate that today each household in the eurozone underwrites €535 in Greek debt (through loan guarantees). However, by 2014 and following a second bailout, this will have increased to a staggering €1,450 per household. The cost to European taxpayers of what looks like an inevitable Greek default will therefore  increase radically in the next few years, making a second bail-out far more contentious than any of the previous eurozone rescue packages." Open Europe economic analyst Raoul Ruparel added: "“A second Greek bail-out is almost certain to result in outright losses for taxpayers further down the road because, even with the help of additional money, Greece remains likely to default within the next few years. Another bailout will also increase the cost of a Greek default, transferring a far bigger chunk of the burden from private investors to taxpayers....Although the uncertainty associated with such an exercise shouldn’t be underestimated, EU leaders should plan for a full, orderly restructuring, which would deal with Greece’s massive debt burden, as soon as possible. However, an honest discussion also needs to be had about whether Greece can realistically remain within the eurozone." But what "honesty" is possible when the only policy is to extend and pretend until it all finally comes crashing down?

Executive summary:

“It will not be the case that the south will get the so-called wealthy states to pay. Because then Europe would fall apart. There is a ‘no bail out rule’, which means that if one state by its own making increases its deficits, then neither the community nor any member states is obliged to help this state”

- Horst Koehler, former German Finance Secretary, April 19921

  • EU member states have in total amassed quantifiable exposure to Greece of €311bn (via their banking sectors, the bail-out packages and the ECB’s liquidity programme). France and Germany have exposure of €82bn and €84bn respectively, while the UK only has €10.35bn exposure – although this figure is misleadingly low, as Britain’s huge exposure to other European banks leaves it vulnerable to any escalation of the crisis in Greece through indirect exposure and undermined market confidence.
  • On the surface, the interconnectivity of Europe’s economies and banking sector may seem like an argument in favour of another bail-out. In a best case scenario, to carry Greece over until 2014 a second bail-out would have to cover a funding gap of at least €122 billion, in addition to the money the country is already receiving from its first rescue package. This assumes a scenario in which Greece can make good on its deficit targets and privatisation commitments. However, it is far from clear that Greece will meet these targets, not least given domestic resistance to more austerity measures. Therefore, the country’s funding gap leading up to 2014 could well be in the area of €166bn, potentially requiring Greece to make a third request for external aid.
  • Despite a second Greek bail-out being EU leaders’ preferred option, it is only likely to increase the economic and political cost of the eurozone crisis. No country in modern economic history has faced similar debt levels to those of Greece – a debt-to-GDP ratio above 150% - and avoided a default. Even with the help of a second bail-out and a debt rollover, Greece is still likely to default within the next few years, as the country’s poor growth prospects and growing debt burden mean that it will be unable to fund itself post-2014.
  • It is therefore better for Greece to restructure its debt as soon as possible. Then an honest discussion needs to be had about whether the country can realistically stay inside the eurozone. A restructuring of Greek debt would require the eurozone to enter unchartered territory – and it is impossible to fully identify all the consequences of such a move. However, these doubts will very much remain even under a second bail-out – the various uncertainties associated with the bail-out packages and attached conditions mean that the threat of an eventual default will not go away in any case.
  • The cost of restructuring will also increase with time, as Greece’s debt burden will only rise over the next few years. To bring down Greece’s debt to sustainable levels today, half of it would need to be written off. In 2014, two-thirds of Greece’s debt will need to be written off to have the same effect, meaning a radical increase in the cost to creditors.
  • Unfortunately, this is a debt crisis and someone will have to take losses. We estimate that the first round effects of a 50% write down on Greece’s debt would

Full report:

greece2ndbailout