Greece: Bailout money will buy Greece only a year. The Greek prime minister's formal request for 45 billion euros from the euro zone and the International Monetary Fund should deal with its immediate financing needs. But there's still no hard promise of cash for year two. And until Athens can show how its debt/GDP will eventually fall, default fears will linger.
George Papandreou has pulled the trigger. In spite of repeated and increasingly concrete signs of support from its euro zone partners, Greece in the last weeks has been unable to convince markets that it could seriously address its long-term financial problems. The situation fast deteriorated this week on the news that last year's budget deficit was higher than previously thought. Yields shot above 8 per cent, with Greek spreads higher than countries like Ukraine or Iraq.
Once euro zone countries have gone through their domestic procedures — which sometimes involve a parliamentary vote — Greece will be able to tap up to 30 billion euros of loans, at a rate a little above 5 per cent. This compares with the 9.5 per cent yield that three-year Greek sovereign bonds currently fetch, and will bring immediate relief in the form of lower debt payments.
Furthermore Greece will be able to draw 10-15 billion euros of IMF loans, at rates that wouldn’t be much higher than 3 per cent. In exchange, a euro zone-IMF mission that is currently at work in Athens could demand some tightening of the Greek deficit-reduction plan. It's unclear how much more belt-tightening they can demand, as Papandreou has already done much of the work. But at least they could help Greece shrink the size of its underground economy which, with fraud and tax evasion, could amount to 8 per cent of GDP according to some estimates.
All this is well and good. The snag is that Greece will still have a funding hole next year if it can’t persuade the markets to lend it money. This is presumably why Axel Weber, head of Germany's Bundesbank, has said the total funding need could be 80 billion euros. Euro zone countries have indicated that further tranches may be available. But given the difficulty of assembling the first tranche, the next instalment is certainly not in the bag. What’s more, even if Athens sticks to its plan, the debt/GDP ratio — now about 120 per cent — will mount. In fact, it will face a double whammy from a continued deficit (which will still be 3 per cent in 2013 under Greece’s plan) and shrinking GDP. Until Greece can show a credible plan that ultimately gets this ratio down, the default option will not be off the table.
