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28th Nov 2021

Euro area states could lose money on Greek loans

  • Analysts are increasingly betting on a restructuring of Greek debt (Photo: badcat777)

The prospect of euro area states making a financial loss on loans to Greece should not be ruled out say economists, despite statements to the contrary by European politicians.

Governments throughout the eurozone are currently preparing the legislative ground in order to channel funds to debt-ridden Greece, with reports the three-year lending package could reach as much as €120 billion.

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Part of the money will come from the IMF, an historic first in the history of the single currency, with details of the package expected to be wrapped up this weekend following talks in Athens.

On Thursday (29 April), German finance minister Wolfgang Schauble said the loans, to be charged at an interest rate of roughly five percent, would not hit the country's taxpayers in the long-run. "We hope that it doesn't cost anything at all, as this is not about tax money, it is about offering Greece a credit that makes it solvent again," he said.

A number of influential analysts think otherwise however, with talk on the possibility of Greece restructuring its debt at some point in the future gathering momentum.

A debt restructuring is likely to play an important role in helping Greece return to a sustainable growth path in the medium term says Fabian Zuleeg, chief economist with the European Policy Centre, a Brussels-based think-tank.

As a result, "it is a very, very real possibility" that creditors such as euro area governments would not receive the entirety of their loans back, he told EUobserver.

"The idea that Greece would be able to pay all of its debt is a heroic one," he says, adding that member states are aware of this but will push ahead in order to shore up the stability of a weakened eurozone.

Economists Jean Pisani-Ferry and Andre Sapir, both from the Brussels-based Bruegel think-tank, agree a debt restructuring is looking increasingly likely, arguing that Europe should prepare a framework for orderly negotiations rather than allowing a potentially chaotic squabble to break out.

"There are serious reasons to doubt that the country will be able to repay its debt entirely," they write in the Financial Times on Thursday. "Given the likelihood of debt restructuring down the road, it [the EU] should waste no time in designing a European debt resolution mechanism to help members with unsustainable debt to resolve it with creditors."

Germany

Diplomats in Brussels remained tight-lipped on the subject however, citing market sensitivities, but German media went to town on Thursday morning over the size of the funds likely to be transferred to Athens.

Tabloid newspaper Bild ran with the headline: "The Greeks want even more of our billions!" accompanying the title with the number "25,000,000,000 euro!" - the proportion of the bail-out they predict Germany will end up paying.

The weekly Die Zeit headlined its main Greek crisis story with: "Are the Greeks Potty?"

Speaking to journalists in Brussels, European economy commissioner Olli Rehn was at pains to stress that aid to Greece would impact positively on all euro area states and citizens.

"I want to underline that this exercise is done not only because of Greece, but for every Euro area member state and their citizens to safeguard financial stability in Europe and globally," he said.

European politicians have faced a growing chorus of criticism over their handling of Greece's debt crisis, with opposition politicians and analysts accusing the bloc of being slow to react.

Euro area leaders are likely to finally sign off on aid to Athens at a specially convened summit around the 10 May, one day after crucial regional elections in Germany. Chancellor Angela Merkel has appeared reluctant at times to throw her full support behind a Greek bail-out, with polls suggesting a bilateral transfer is unpopular with voters.

"It is unthinkable that we have to wait another two weeks before the mechanism to help Greece is set in motion," Liberal leader in the European Parliament Guy Verhofstadt said on Thursday. "The debt crisis is spreading and must be stopped now."

Portugal

Fears have increased this week that Portugal may be the next in line to suffer from market doubts, with the country receiving a fresh credit rating downgrade on Tuesday.

"I expect markets to focus on Portugal in the coming weeks," says Fabian Zuleeg. "The EU must send out a strong signal as part of the Greek package," he adds, indicating that this means letting markets know that Portugal could also potentially receive EU aid.

To date the commission has stressed that the severity of Greece's situation requires its own ad hoc mechanism, while a more permanent crisis mechanism would be set up to help other states which needed support in the future. Such a structure could take months or even years to set up, however.

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