The Good News from Brussels: Extending Greece's EUR 110 bln Loan Term

Over the weekend, the Eurozone and IMF agreed on a EUR 85 bln bail-out for Ireland (the total sum includes IMF and Irish own contributions).

The excellent news for Greece is that its own loan repayment term has been extended from 5-6 years under the current agreement, to at least 10 years in total, i.e. to 2024. This is to harmonise its conditions with those of Ireland’s.

This is excellent news, because one of the main risks since the drafting of the EUR 110 bln bail-out has been the apparent impossibility of repaying the bailout and refinancing private sector loans in 2013 and 2014, which total EUR 70 bln in 2013 and EUR 76 bln in 2014.

This news should, however, also be viewed with caution:

·         The greatest threat now would be a diminishing appetite for further austerity and reform efforts: we should be reminded that so far, only the simplest of reforms have been enacted.

·         The total interest on the debt will continue to rise, with the bail-out itself at 5.2% on the normal loan term, and the debt to the private sector coming in at astronomical yields (under current conditions). This is not sustainable. It remains to be seen whether Greece’s purported primary surplus in 2013 and thereafter will be able to deal with this added debt load.

·         The continuing contagion in the financial market, and the unchanged severity of public deficits and debt in the OECD (together with longer-term economic decline and apparent political paralysis), means that conditions continue to deteriorate over the long term. What will the financial markets be like in 2013-2014? Hard to tell.

The government has gained some breathing room, and for this we should thank the feckless EU banking stress tests in the summer of 2010, and the apparent dissimulation of the Irish government on the true severity of its banking crisis. Or at least the Eurozone's apparent reaction to the latter. For once, PASOK has nothing to do with it. Eireann go braugh!