Greek Bailout - take III: Don't bore me with the details

In today's City AM we assess the latest attempt by eurozone leaders to come up with a credible second Greek bailout package which involves a substantial contribution from the private sector. Unfortunately, despite the headlines looking good, eurozone leaders have glossed over the details and left too many unanswered questions. History has shown that leaves significant scope for watering down the deal. Here's the full piece:

ANOTHER summit gone and another Greek bailout plan to assess in the cold light of day. On the surface this one sounds promising: a 50 per cent write down for Greek bondholders and €130bn in new bailout funds – should sort things for a while, right? Well, unlike in previous rounds, Wednesday’s meeting between Eurozone leaders saw some real progress. But with the risk of being a killjoy, it still falls far short of what is needed to solve the Greek and Eurozone crisis.

Firstly, even with this 50 per cent writedown the EU/IMF/ECB troika estimates that the Greek debt-to-GDP ratio will still top 120 per cent in 2020. In other words, after almost a decade, Greece will be where Italy is now, if – and that’s a big if – it meets all the growth and austerity targets laid out for it.

Secondly, the headline figure of 50 per cent writedown is misleading. The share of bondholders taking part is unknown, but it certainly won’t include the near €130bn held by the EU, IMF and the ECB. In the most optimistic scenario there would be a 90 per cent participation rate from the remaining €220bn, giving a writedown revenue of around €100bn at best. This means a 28 per cent debt reduction for a country whose debt-to-GDP ratio could top 165 per cent next year, in the most optimistic scenario. It doesn’t exactly return the country to solvency in the immediate or medium term.

Then there’s the on-going issue of transferring debt from the private sector to taxpayer backed institutions. Another €100bn in taxpayer loans will mean that by 2014, around 80 per cent of Greek debt could be held by taxpayer backed institutions. Given that Greece will in all likelihood still be insolvent and will need to default in the near future (see above), taxpayers would be exposed to substantial losses. This would not only be economically undesirable but would potentially cause some serious political divisions in the Eurozone. It would also trigger more debate over the possible illegality of the bailouts under the EU Treaties – since loan guarantees become outright losses. In combination, this would present a threat to the stability and sustainability of the Eurozone, leading to profound uncertainty.

Equally worrying for taxpayers is that the figures for this bailout don’t quite stack up. Of the €130bn headline figure, €30bn will go to providing “sweeteners” for bondholders taking part in the writedowns (collateral, guarantees or even cash pay outs – which is not what taxpayers want to be funding), while at least another €30bn will need to go towards recapitalising Greek banks. Greek financing needs over the next three years could top €165bn (on top of the original bailout payments), meaning this bailout and writedown will at best only be able to cover Greece for a few years.

Many questions remain but the specifics we have aren’t pretty: a continually insolvent Greece, an increasing taxpayer burden, a bondholder bailout and a looming default. Instead of fabricating complicated financial instruments (which they previously lambasted for causing the crisis), Eurozone leaders should accept a full hard restructuring in Greece, full recapitalisation of European banks and begin implementation of the necessary reforms to boost growth and competitiveness.