Open Europe Blog

Given that Greece lacked any real political presence at last week’s EU summit, discussions on the crisis in Athens were fairly minimal and it was largely overlooked during the ensuing press coverage.

However, Kathimerini has an interesting report today suggesting that Greece could attempt to get the cost of its bank recapitalisation removed from its sovereign debt levels – in the same way that Spain is hoping to do. This could well be seen by eurozone leaders as a way to quickly reduce Greece’s debt burden – although we don’t think it will change any of the fundamental problems which it faces.

A large amount of the second Greek bailout – around €50bn – is actually going to Greek banks to help them absorb the large losses they faced from the Greek debt restructuring. With Greek debt currently standing at around €327bn or 160% of GDP, removing €50bn from this figure could provide a significant boost to Greek debt sustainability – bringing the figure down to 136% of GDP.

There are, however, a few important caveats to note here:

  • Firstly, 136% is still an unsustainable debt level, even with this reduction the Greek debt burden is still huge and the need and demands for austerity are not likely to waiver . 
  • Secondly, and possibly more importantly, is that this will only be an adjustment on paper for all intents and purposes. Greek banks are dead on their feet, living off liquidity from the ECB and the Greek Central Bank. They will never be able to repay this money and it will still ultimately be underwritten by the Greek state. So, even if this debt is shifted off the official figures it will still be a burden of the state – in reality little will have changed. 
  • Lastly, this process will not happen anytime soon. The bailout funds cannot lend directly to banks until the ECB is in place as the eurozone’s financial supervisor, and as we have noted, this will be at the earliest the start of next year. This also happens to be the period by which we have suggested that leaving the euro may become more attractive from a Greek perspective. 

An interesting development which seems to have mostly slipped under the radar then. We wouldn’t be surprised to see the eurozone and Greek leaders take advantage of this opportunity to gain a large reduction in the superficial figures on Greek debt – it would make for an effective headline figure and would likely buy them some more time in terms of making Greek debt look sustainable in their and the IMF’s models. Ultimately, though, it would only be window dressing, further shifting of funds around to try to make the situation seem better than it is. In the end, as we have always said, there are no easy answers to the Greek or eurozone crisis.

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