Plan contains costly paradox

Financial Times
July 22, 2011

Insistence by Europe’s leaders that private bondholders shoulder part of the burden of a new Greek rescue package could cost Europe’s taxpayers tens of billions of euros.

The public cost of making the private sector pay is a central paradox in the new Greek bail-out, and part of the reason for a tortured, months-long debate among leaders before they finally found agreement on Thursday night.

“It would have been less expensive and less risky to do this without [private sector involvement],” said a senior official from the European Commission, the EU’s executive arm. “But it was sine qua non for some member states.”

Of €109bn ($157bn) in official bail-out loans to Greece, only €34bn will be in traditional rescue funding like the loans sent to Athens in last year’s €110bn bail-out – or the €78bn sent to Portugal and the €65bn to Ireland.

The rest – €75bn in loans from the eurozone’s bail-out fund and the International Monetary Fund – will, one way or another, go to an elaborate plan to induce private bondholders to participate, or repair damage of bondholder programmes.

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