The Greek EU-IMF bail-out is looking more and more hopeless. The IMF is limiting its share in the bail-out to 10 billion Euros. The remainder will have to come from the rest of Europe’s nations. As Greece’s refinancing will be in the tens of billions, or hundreds of billions looking ahead, the scale of the rescue is going to struggle to get anywhere near the size of the problem.
The next problem is the rate of interest. Greece is asking for 4-4.5%, which other EU countries are offering, as long as they can refinance from the ECB, the same money without apparent loss. Germany, however, is insisting that Greece must pay 6-6.5%, the market rate it is currently paying for 10 year bonds.
If Germany goes off the market rate, the German Constitutional Court will rule the action unconstitutional, and throw Germany into a political crisis.
The FT writes –
Eurozone leaders agreed to offer Greece an emergency loan package from the International Monetary Fund and the eurozone if it was unable to raise debt in the market, but they insisted the interest rate on the European portion of a bail-out would be unsubsidised. Most eurozone nations are prepared to offer loans at 4 to 4.5 per cent, the rate paid by the eurozone’s other big debtors, Ireland and Portugal, EU officials told the Financial Times. But Germany says Athens should pay 6 to 6.5 per cent, the rate it pays on its 10-year bonds.
Donor nations would be able to refinance money lent to Athens at the lower rate without themselves losing money. Germany, the officials said, took the view that “unsubsidised” rates meant Greece could borrow only at rates it last paid on the market. Berlin fears a veto from its Constitutional Court if it agrees to cheaper financing.
“If you say Greece’s whole consolidation effort is endangered by it paying such extremely high spreads [against German government bonds] you have to ensure the spread comes down,” said one senior EU official.
“But the Germans say the Greeks have lived beyond their means, they must solve their problems themselves,” and thus pay 3 percentage points more in interest, or twice as much, as Berlin pays on its 10-year bonds.
This is a non-election issue in Britain. But the size of Greece’s economic black hole will ultimately overwhelm the rescue efforts being made. This story is currently hiding in the financial pages. The crashing Euro will in time become the most crucial political story of the decade. They are only buying time. The inevitable will happen.