Eurozone finance ministers have reached a partial agreement on the second Greek bailout and a restructuring of the country’s debt, but they postponed a final decision to next week. They will probably get there, but this remains a bad deal for both Greece and eurozone taxpayers.
As Open Europe has pointed out, Greece will most likely default or be required to take another bailout in three years' time, even with the help of this rescue package. Stuck with very poor growth prospects, the debt relief that has been offered to the country is not nearly enough to allow it to bounce back – initially, it only shaves off 2% of the country's debt to GDP (through the debt restructuring that will come with the bailout), while a large chunk of the bailout cash will go to banks and bondholders, not the Greek people.
But as we showed in a briefing published yesterday, there is another twist that should really worry taxpayers and political leaders across the eurozone and beyond. Consider the three graphs below.
Graph 1 shows that at the start of this year, 36% of Greece’s debt was held by taxpayer-backed institutions – the ECB, the IMF and the European Financial Stability Facility (the eurozone bailout fund).
The next graph shows that following the voluntary Greek restructuring and the second Greek bailout (around summer 2012) we expect that a huge 62% of Greek debt will be owned by taxpayers.
And here’s the really worrying part. By 2015, once all the cash from the second rescue package has been paid out, taxpayers’ total share could increase to as much as 85%.
This means that in three years' time there will simply be too few bondholders and banks left holding Greek debt to offer any substantial debt relief. Eurozone taxpayers will then be left carrying almost the whole the burden from a Greek default.
You have to be in pretty strong denial not to see how this is setting Europe up for a pretty nasty political shock. Taxpayers in Triple-A countries will despise having to see the loans they underwrote – and were promised would be returned – turning into outright losses running into the billions. For their part, the Greeks will resent having to go through years of painful austerity, only to see their country go through a humiliating and complicated default anyway.
The alternative is a third bailout, which is equally complicated politically.
As we've argued since the very beginning of this crisis, given the huge size of Greece's debt, the only option is a fuller, coercive restructuring, which gives the country the chance of a fresh(er) start. It may still not be enough, but at least it gives Greece some hope of recovery.
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