The 16 Eurozone countries have now hammered out a â‚¬30 billion package to save Greece from its own debt spiral during an emergency teleconference of the zone’s finance ministers.
The money will be offered this year at 5% for three years, which is well below market rates of about 7.5% that the country’s own bond yields should dictate.
A further â‚¬10-15 billion of money from the International Monetary Fund (IMF) could also be made available at the extremely low rate of 2.7%.
Greece will for the moment continue to implement internal austerity measures and source funds from the commercial market rather than accept this offer of help. But with the backstop in place it should prevent further speculation driving debt interest rate increases forcing Greece to the wall.
It is hoped that this is a clear enough message to the markets after the initial drift that drive Greek bond yields up. The real test will be whether Greece can re-finance â‚¬1.2 billion in debt today and a further â‚¬11.5 billion during May. Greek bond prices are expected to rise today so dropping the yields thus sending out a calming message that all is under control.
The Eurozone money would be given by member countries in proportion to the amount they put into the European Central Bank. This would put further strain on the other so-called PIGS countries of Spain, Portugal and Ireland.
Germany could have to put in â‚¬6.7 billion towards the package, which at 5% is well below their initial demands of 7% return. There is much debate in Germany over the bailing out of what is seen as Greek profligacy and the deal could well end up under constitutional challenge. If Greece is forced to use the package (which many see as inevitable) and IMF funds are also called upon, the UK as a 5% contributor will be helping to bail Greece out to the tune of Â£650 million a year.
This may well now have set the precedent. But having this plan does not eliminate the risk. What it has done in reality is spread the risk amongst all 16 Eurozone member states. Greek risk has been ‘sliced and diced’ and each member state now carries a portion of it within its own sovereign debt. The risk has become ‘collateralised’, just as sub-prime debt has become spread through CDOs and it will have to be priced in somewhere. The big question now is who is next? Should one or more of the other PIG countries need the same backing it will further dilute the strength of the other nations’ own sovereign debt. Is a single currency going to eventually force an effective single sovereign bond market for the Eurozone too?