Greece - Greece's sovereign-debt crisis Still in a spin A...

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Greece's sovereign-debt crisis Still in a spin A rescue by the European Union and the IMF has given Greece some breathing space. But much more may need to be done to avert eventual default Apr 15th 2010 | from the print edition TWO months ago the governments of the euro zone agreed in principle to offer emergency loans to Greece. A near-panic in the bond markets has now forced them to spell out the terms of support for their stricken colleague, should it be needed. If push comes to shove, the other 15 euro-zone countries are willing to provide Greece with up to €30 billion ($41 billion) of three-year fixed- and variable-rate loans in the first 12 months of any support programme. The announcement was made by Olli Rehn, the European Union’s economics commissioner, and Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, after a telephone conference of the Eurogroup on April 11th. The chief obstacle in previous negotiations had been the interest rate to be charged for the rescue loans. Germany had insisted on “market rates”—ie, with no element of subsidy. That made little sense: if a backstop were provided only on such terms, what would be the point of it? Eventually a formula was found that both met Greece’s needs and satisfied the Germans. The interest rate for emergency aid will be 3.5 percentage points above the benchmark “risk- free” rates for euro loans. That works out at around 5% for a fixed-rate loan, which is less than markets were asking of Greece before the deal was struck but still steep. Portugal and Ireland, the next-riskiest borrowers in the euro area, pay less than half as much for three-year money. Germany pays a mere 1.3%. The IMF is expected to chip in €15 billion, at interest rates that are likely to be a little kinder to the Greeks. The resulting package of €45 billion would be enough to finance Greece’s budget deficit for the rest of this year as well as repay its maturing debts. Yet Greece is likely to need far more support than this as it struggles to put right its public finances. Cracks in the masonry An earlier analysis by The Economist (“ Safety no t ”, March 27th) suggested that Greece would need at least €75 billion of official aid. We based this figure on several assumptions: that Greece would need five years to stabilise its ratio of debt to GDP; that it could take the pain of a brutal fiscal retrenchment; that private investors would still be willing to refinance existing debts, at an interest rate of 6%, if a rescue fund covered the country’s new borrowing; and that the economy would start to grow again in 2013. An updated set of projections is set out in table 1. We have made two changes so the analysis is a bit rosier. We now assume that Greece cuts its budget deficit, as a share of GDP, by four percentage points this year, as planned, so it has less to do later. We also assume that the interest charged on all maturing and new borrowing is 5%, in line with the cost of the aid offered by Greece’s euro-zone partners. With those changes, we reckon Greece would need
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