Greek Rescue Package Insufficient, Will Need More Money

We recently highlighed the words of Erik Nielsen who stated that the E110 billion Greek bailout package will simply not be sufficient, expecting that at least another 40 billion will be needed for an effective rescue operation. Today, the WSJ and German Bild, get on board this theme, likely causing further anguish for Greece and for the euro, as it once again highlights just how incompetent European bureaucrats are. Ironically, in their attempt to lowball the rescue numbers, they may have just doomed the package, because we are confident German opposition (and you should see the cover pages of all German newspapers - there are 99 headlines blasting the rescue for 0.5 praising it) will use this disclosure to mount an attack on the "openendeness" of the what may soon turn out to be a neverending rescue package. And this does not even contemplate Portugal and Spain. 

The WSJ is surprisingly blunt in its estimation of the Greek disaster:

The €110 billion ($147 billion) three-year Greek bailout by euro-zone countries and the International Monetary Fund won't be enough to cover Greece's costs, an examination of Greek financial figures shows, setting Europe up for more tough choices if private markets don't start lending again

In essence, although the bailout envisages three-year loans, the EU and the IMF have given Greece a 12- to 18-month audition to show it can change, economists say. Then, it is back to the markets. Greece needs a lot of cash.

Even if Athens can pare the budget gap as much as promised, it will run significant deficits in the coming years that need to be paid for. A deficit projected to be 8.1% of gross domestic product this year is expected to fall gradually to 4.9% in 2013. That implies total deficits over the coming three years on the order of €50 billion.

Greece also will need to pay back past years' borrowing. According to data from Reuters, Greece has about €70 billion due between now and early May 2013. That brings the total financing to at least €120 billion.

Counting the continued rolling-over of short-term debt, Goldman Sachs economist Erik Nielsen estimates Greece's needs at about €150 billion over three years. The sum of €110 billion has "taken the market out of the equation for at least 12 months," he says, but not three years.

As we pointed out yesterday, the euro staged a dramatic reversal after going as high as 1.33, subsequently closing much lower, and now at around 1.315, as round number N+1 of fears that the bailout will not work enveloped the market. Too a big extent the EC itself was responsible: "An official of the European Commission, the bloc's executive arm, said the bailout is indeed "a little short" of Greece's entire need. But, he added, the bailout plan foresees that "they will get back to the market in 2011."

Ironically, with the explicit support of the ECB and the fact that the Bank now accepts any worthless Greek government bond as collateral, the only buyers for Greek bonds may soon become other European banks, which already are on the hook for hundreds of billions in exposure to Greece. Essentially, all Europe is doing, is precisely what the US did in in late 2008: it was went double all in, even with money it can never hope to have.

ECB President Jean-Claude Trichet had said explicitly in January that the ECB wouldn't take such a step. The ECB's past rule had been to accept only bonds above a certain minimum rating.

As an immediate consequence, the new collateral rule will ward off any liquidity crises at Greek banks, which are major holders of Greek debt. They will be able to get cash from the ECB by pledging their Greek bonds as collateral.

More broadly, it may make euro-zone banks more likely to buy Greek debt, because they know they will be able to get cash for it. Greece could sell short-term debt to local banks, which could then turn around and place it with the ECB, no matter what the country's credit rating. In effect, "you could be in a situation where private financing becomes irrelevant," says Daniel Gros of the Centre for European Policy Studies in Brussels, "and Greece is financed by the ECB."

Indeed - let's disintermediate the private markets altogether: after all public and sovereign risk is now the only risk outstanding, as all developed nations have now taken private risk off the table entirely. And with that the Keynesian seeds of certain European destruction are now guaranteed to bloom into yet another mutated plant of financial and economic cataclysm.

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