Financial Times
May 16, 2010
It is getting harder, politically. Finland and Germany have approved the bail-out of Portugal. But it is not clear whether both will vote in favour of the second Greek loan package, due this autumn. I still think they might, but it is not hard to imagine some political accident, in Berlin, in Athens, in Helsinki, in all three or somewhere else.
Pressure for a Greek default inside the eurozone is growing in Germany. Most policymakers and economists agree that Greek debt is not sustainable. Some commentators in British and US newspapers have even been advocating a Greek exit from the eurozone. The European Central Bank rejects both these suggestions. It even rejects a voluntary restructuring of debt. We are at a political impasse in the resolution of the Greek crisis. There is a little time left to take decisions, but the European Union is running out of options. So where next?
The original €110bn loan envisaged Greece returning to the capital markets in 2012. This is, of course, unrealistic. The next goal is to tide Greece over until 2013, when the new European stability mechanism (ESM) will kick in. That would require approximately another €50bn, but this supposes that the Greek economy turns the corner in 2012, and that the Greek government, in a triumph of hope over experience, can implement a much larger privatisation programme than it currently proposes. The new Greek loan programme will be much less than €50bn; my understanding is that it will be a little over €30bn, shared as usual between the EU and the International Monetary Fund.
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