October 29, 2012
Open Europe published a new flash analysis on Friday, which looks at the prospects of a revision to the Greek bailout. It now looks almost certain that Greece will receive a two year extension to its fiscal consolidation and reform programme. However, questions remain over how much it will cost and how it will be funded. Open Europe estimates that the extension would cost a minimum of €28.5bn, if Greece meets all its targets. Meanwhile, none of the options for providing the funding looks politically or economically palatable.
The €28.5bn comes from: an extra €14bn due to slower deficit reduction, an extra €12bn from reducded privatisation receipts and an further €2.5bn from increased government arrears (unpaid bills).
We examine six key options for filling this gap:
1. A reduction in interest rates – which looks very likely but could only deliver €2bn – €3bn.
2. Increased short term debt issuance and more austerity – this looks possible and could deliver anywhere between €15bn – €20bn.
3. Extending length of loans to Greece – unlikely, it could raise €9.1bn in the short term, but on net it would give zero reduction.
4. ECB forgoing interest and/or profit on its Greek bonds – looks very unlikely, but could yield €1.15bn – €2.3bn (interest rate cut) and/or €14.25bn (forgoing profit).
5. Bond buybacks – again very unlikely, but it would mark a much larger step than simply covering the funding gap, as it could deliver €45.65bn overall and €17.15bn after the two year extension is paid for.
6. Write-down original eurozone bilateral loans – this would be a huge step and could provide €26bn to €52bn but looks very unlikely to be approved, especially as it would support in national parliaments.
Overall then, its hard to see how the gap will be filled without some larger decision being taken over the future of Greece in the eurozone. To read the full note, click here.Open Europe blog team