The other day a deal was finally struck on how to fund Greece for the next few years after many late night meetings and circular discussions. Although the deal may allow Greece to carry on for now, it seems likely that it will continue missing the targets set by the EU/ECB/IMF Troika, meaning a new funding gap will open and fear of ‘Grexit’ will resurface before too long. But the one thing that this deal did drive home is, when it comes to Greece, just how far down the wrong path EU leaders have gone.
As a recent Open Europe analysis shows, 70.5 per cent of Greece’s €301bn debt mountain is now held by taxpayer-backed institutions (eurozone governments, bail-out funds and central banks as well as the IMF) – that is around €212bn, well over 100 per cent of Greek GDP, and by the end of January next year this is set to increase to close to €250bn. A further €14bn could be needed to execute a buy-back of Greek bonds – one of the measures included in this week’s deal, which involves using new funding to purchase Greek debt at a low price and then retire it, providing a reduction in debt equal to the difference in the purchase price and the original price of debt. In addition, we’re now looking at numerous billions which the eurozone governments and central banks will forego in profits on their holdings of Greek debt and reduced interest rates on loans. (Although how this isn’t seen as a loss for the countries or at least an increase in the loans remains an enigma).
To put this in context, Greek debt at the time of the first bailout was just over €300bn, all held by private creditors – by the end of this year it is set to be €344bn. In other words, not only has Greece’s debt continued to increase while Greek GDP has plummeted, but it has been overwhelmingly handed over to innocent eurozone taxpayers. This also means there’s very little private debt left to write down, setting taxpayers up for major losses should Greece sink in, say, 2015.
It’s hard not to conclude that simply writing down the debt in the first place would have been a far superior course of action – much cheaper and more effective for everyone involved (apart from some banks and investors, but they could have been aided with far less money than the amount that has been poured into Greece so far). Now, to be a Monday morning quarterback, as the Americans say, is always easy, but many pointed this out at the time – including Open Europe which gave that recommendation as early as February 2010.
But it is even more important that lessons are learnt. Eurozone leaders should keep Greece in mind when dealing with Spain and its banking sector. A continued reluctance to fully accept the depth of the problems and resolve them now could come back to haunt them in the future (see here and here for our full recommendations for how to deal with the Spanish crisis). As has been noted in many a crisis, policymakers biggest failing could be failing to learn from previous mistakes.
If this continues, there will be no end to the costs of the eurozone crisis.