A Few Snags in Greece’s Bailout

Greece apparently has its 130 billion euro bailout, which should probably carry it through 2014. At least that is the intention. Private creditors have agreed to a 53.5% reduction in the value of their paper. Institutions that have had such cram-down terms will not be back as lenders. So, the officials of the European Union, European Central Bank and International Monetary Fund will have to hope that their financial package is enough, even if that hope is entirely unrealistic. It is worth a look at what may happen to Greece, and the eurozone, over the next few years — or even the next few months — now that the basic structure of the Greek deal is set.

The most likely set of circumstances, and one that few economist disagree with, is that Greece will need more than 130 billion euros before 2014. The austerity measures the government has set will not be adequate to offset a drop in gross domestic product, which is currently 6% — part of a recession that is five years old and shows no sign of ending. The need for new money will again test the will of France and, especially, Germany to provide capital. Sarkozy may have been thrown out of office by 2013. The same could be true of Angela Merkel. The people who have to make future aid recommendations may not be willing to do so.

The financial situations of Portugal and Spain could get much worse. That would increase the need for bailout money exponentially. The problem becomes even more difficult if the Italian economy stumbles badly. A “triple bailout” could cost as much as $1 trillion, many experts expect. The major rescue fund — the European Stability Mechanism — has not been set up entirely. It would have to join with the IMF and ECB to create a new rescue, and there is no evidence that the three would work together for a bailout that is seven or eight times the amount of the one for Greece.

If trouble grows in Europe, then the U.S., China and Japan may put more money into the region, probably through the IMF. Congress may not recommend any aid, if the drive toward austerity in the U.S. continues. Japan may contribute, but it has financial difficulties of its own. That leaves China, which says it will help Europe, but has not said at what level and for how long. If Europe has to depend on China for a bailout, it may have to wait for a very long time. Economists think China will act in its own interests because it needs Europe to consumer its exports. But the government of the People’s Republic could believe the cost is too steep.

Greece has been bailed out, it seems. It is impossible, though, to guess what the financial trouble in the balance of the EU will cause, even as early as the end of this year.

Douglas A. McIntyre