Tuesday 12 December 2017

Unprecedented test for the EU, but will it pass?


Q: Why is Greece seeking to activate the bailout package now?

A: Yields on Greek bonds shot up to almost 9pc on Thursday. This threatens to make prohibitive the cost of the new loans Greece needs to raise.

Q: Why does Greece need a bailout?

A: With a national debt of more than €300bn and a 2009 deficit equivalent to 13.6pc of GDP, the financial markets have lost faith in Greece, which needs to raise €60bn of new loans by the end of the year.

Q: How much will Greece get?

A: Under a package agreed by EU leaders and the IMF earlier this month, EU members will contribute €30bn to a Greek bailout fund and the IMF will chip in with €15bn, a total of €45bn. Greece will then be able to borrow this money.

Q: How much will Greece pay for this money?

A: Greece will be charged a 5pc interest rate on the €45bn. While this is steep by international bond market standards it is much less than the near 9pc yields Greek bonds were trading at this week.

Q: With debts of €300bn is €45bn enough?

A: That's the question bond traders are also asking. The package buys Greece time to sort out its chaotic public finances. However, with the Greek economy in deep recession there are doubts that €45bn will be enough, even if the Greeks deliver on their promised spending cuts and tax increases. Already some analysts are predicting that the package is only sufficient to tide Greece over for 12 months.

Q: Now that they have asked nicely, are the Greeks guaranteed to get the money?

A: Maybe. Under the deal thrashed out earlier this month, EU member countries must vote unanimously in favour of activating the Greek bailout package for it to take effect. This means it would take just one country voting against to scupper the whole deal.

Q: What are the chances of this happening?

A: Germany continues to harbour deep reservations about the bailout package. Yesterday Chancellor Angela Merkel insisted once again that the bailout package would only be activated if the Greeks delivered a "credible" programme of spending cuts. With the modest cuts already announced provoking massive demonstrations and riots that could prove easier said than done.

Q: Will Ms Merkel's approval be sufficient to implement the bailout?

A: Not necessarily. A large body of opinion in Germany remains implacably opposed to the bailout package. German opponents of the deal argue that it breaches the eurozone's "no bailouts" rule and have threatened to take a case to the German constitutional court if the deal is activated.

Q: If the Germans don't block the deal, when can the Greeks expect to start receiving the money?

A: Assuming all of the EU member countries vote in favour, the first

bailout money should reach Greece in about four weeks.

Q: Where is the EU's €30bn coming from?

A: The €30bn is being contributed by the individual members states.

Q: Does that include Ireland?

A: Yes it does. Ireland is contributing €450m to the bailout fund.

Q: But Ireland doesn't have €450m. Does this mean we will have to borrow the money?

A: No one is saying so but it certainly looks like it. We can only hope that if we get into a similar scrape to the Greeks, that the EU will pass around the hat for us.

Q: If Greece defaults on its debts will we get this money back?

A: I was hoping that you wouldn't ask me that question. With its economy shrinking and its national debt at well over 100pc of GDP, most analysts expect Greece to default some time over the next few years. This would mean that anyone, including Ireland, who had lent it money would suffer a "haircut", ie, not get all of their money back.

Irish Independent

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