Why Greece needs another 110bn euros

 
Communist party affiliated protesters in Greece Protests against the government's latest austerity measures continue in Athens

Greece's current predicament can be told in numbers, big ones.

The national debt is around 340bn euros.

That is one and a half times the value of everything the country produces, its GDP, or 30,000 euro for every Greek citizen

But even so, Greece continues to borrow, at a rate of more than 20bn euros a year, because of a deficit (the gap between what the Greek government spends and what it brings in from tax revenues) which is running at 10% of GDP every year.

Little wonder then that banks and commercial investors no longer want to lend to Greece. They fear that Greece has borrowed more than it can ever repay and that they would not get their money back.

But if Greece defaults on its debts, that will make its own banks insolvent and do severe damage to banks and financial institutions in Germany, France, the US and elsewhere (not exactly a secret, that).

'Painful truth'

So just over a year ago Eurozone governments and the International Monetary Fund promised to provide Greece with emergency credit of 110bn euros

It wasn't enough. From 2012-2014, Greece has to find something like 170bn euros or 180bn euros to repay maturing debts and finance the government.

So with what's left over from that original emergency loan, Greece probably needs another 110bn or 120bn euros or so of additional finance (George Papandreou, Greece's premier, put the requirement at 110bn euros over the weekend).

Greece crisis

Germany, France and other Eurozone governments don't want to provide all the extra money - which is why they're putting pressure on Greece to contribute about 30bn euros through privatisations and on banks and investment funds to lend 30bn euros or so back to Greece from the cash they receive when existing Greek loans mature.

Goodness only knows whether that 60bn euros from privatisations and so-called private-sector involvement will turn up.

So the potential increased exposure for Eurozone taxpayers of between 50bn euros and 120bn euros is sufficiently large to provide quite a big incentive for the British government to argue that Greece isn't its problem.

Which is why David Cameron, the British prime minister, is insisting that the the UK won't be part of the solution.

Right now, there doesn't seem to be huge pressure from Eurozone governments for the UK to chip in - although the German finance ministry is angling to find a way to hook Britain into the rescue.

The painful truth for Britain is that a Greek default that precipitated big losses on loans to Ireland, Portugal and Spain would be immensely unpleasant for the UK's supersized banks - and, by implication, for British taxpayers too.

And the UK could hardly insulate itself from a Eurozone tipped back into recession, were that to be the consequence of a disorderly Greek default.

In other words, there could be circumstances in which it was in the British national interest to contribute to a Greek rescue (not that you'll hear prime minister or chancellor admit that, in anything other than conditions of a clear and present danger of Greek meltdown).

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 127.

    Europe can not support all the failing currencies/economiesm it is a delusion of granduer on behalf of the Brussels politicians, who wish to 'save the World'. Many of the newer European countries are almost third world, with no perception of finance and industry. Their governments wish to please the people without any idea of economics, hence the debts. Let them go bust!

  • rate this
    0

    Comment number 126.

    John @121
    This type of positive feedback bubble is called biological growth. It's a product (pun intended) of financial derivatives, the network effect and the outsourcing of money creation to the financial sector. We should have a negative feedback system of money creation, where money supply grows during bust periods and is static during boom periods. Instead we have biological money.

  • rate this
    +1

    Comment number 125.

    How do we know exactly what the debt should be?
    I have said over and over the books must be audited to see how the debt came to be, what comprises it. As far as I know such an audit has never occurred. So I keep asking myself why not. I do know that one south American country did such an audit & found that the true debt was 800M vs. 3.4B. I wish I could remember the details of this audit.

  • rate this
    0

    Comment number 124.

    @118.blacksheep44

    No matter how much that idea circulates as a "joke" it will never happen. Giving their Germans all public companies with prices below cost is treason enough that someone will end up paying for.

  • rate this
    0

    Comment number 123.

    111.biggles247
    They bit the bullet last year, we too see that this is going nowhere and would prefer to bite the bullet for something that may actually work and not something that will just ruin us with no benefits at all.

    "In my naive way" - Ditto... would be nice to read both sides sometimes...

  • rate this
    0

    Comment number 122.

    96.lloydgeorgeknew
    1. No part of Greece will ever be sold to Turkey, they can come and get it if they want but funny how the EU would have no problem selling out EU land... what a farce they are.
    2. There is noCyprus that is Greek, in the sense of part of Greece. Ethnic Greek Cypriots have their own independent country called the Republic of Cyprus, not a Greek province. Ignorance is bliss!

  • rate this
    +1

    Comment number 121.

    What we are seeing in Greece and other countries is the effects of a system that runs by positive feedback - viz - debt creation.

    To have sufficent money (=debt) in the economy to repay loans (WITH INTEREST), the banks have to create even more debt. Eventually they run out of people who are able to repay the debt + interest and have to create new debt with people who are riskier.

  • rate this
    -1

    Comment number 120.

    This blog is useless. Is it run by poor educated people? I wonder why the UK is in such a mess ? It's easy, lack of education.

  • rate this
    0

    Comment number 119.

    re #100
    No responsibility for the politicians then? And not just in Greece?

  • rate this
    0

    Comment number 118.

    Suggest a few of those Greek Islands get handed over to Germany and then they call it quits.

  • rate this
    +1

    Comment number 117.

    108.ak35

    Whilst I don't exactly want to defend the banks in their lending of money, I do have to question whether Greece should be absolved so readily.

    No one forced Greece to borrow money to fund extravagent projects. Greece essentially lived in its overdraft, and no one sensible should do that.

    They must take their share of the blame; the banks didn't do everything.

  • rate this
    +3

    Comment number 116.

    114.vegetable_grower

    A pessimist is just the name given to realists, by optimists ;-)

  • rate this
    -1

    Comment number 115.

    Greece should be allowed to default. If necessary the banks that are exposed fatally should be nationalised and the management removed and a new banking model should be born out of this crazy mess. At the moment all we stand to do by bailing them out is postponing the inevitable and taking taxpayers money and giving it again to the bankers. Let the house of cards collapse.

  • rate this
    0

    Comment number 114.

    106.Anglophone: expecting something to happen (because it seems the most likely outcome) isn't the same as urging it/hoping it will happen.

    My preferred outcome would be growth and prosperity for all. But I don't make plans based just on what I prefer to happen. I take into consideration what I believe is most likely to happen.

    And, of course, a pessimist can only be pleasantly surprised :o)

  • rate this
    0

    Comment number 113.

    101.Arthur Daley

    No matter - that's the practicality. EU are well used to fudges and bending the rules so it should not be an issue.

    And - Germans should really know better. After all they were the most experienced in the pack after their own problems with absorbing the old DDR.

    Of course - blatant fraud by Greek politicians at the application time is another matter. Criminal that is.

  • rate this
    +1

    Comment number 112.

    96.lloydgeorgeknew

    Cyprus is an independent country (for many decades, previously part of British Empire, probably Ottoman Empire before that).

    It is a member of the EU.

  • rate this
    0

    Comment number 111.

    In my naive way, why don't the Greeks realise the predicament they are in and bite the bullet? They are going to have to repay their debts eventually, austerity is a necessity and demonstrations are not the answer

  • rate this
    -1

    Comment number 110.

    'Beware greeks bearing gifts?' This well known phrase sounds rather odd now.
    It has been well known for decades that the greek national sport is avoiding paying taxes and coupled with a weak and vascilating Greek government this problem surely could have been seen coming by the clowns who allowed them entry to the Eurozone. It would be nice if someone responsible from the EU resigned.

  • rate this
    0

    Comment number 109.

    When will you stop using GDP comparison for government debt/deficit ? GDP has nothing to do with government debt or deficit - it's a big lie to pretent that goverment is not borrowing so much. Government debt\deficit should be compared to tax income which is basically the only source of income the government has. When will the journos including Mr. Peston(no, they are not real journalists) learn?.

  • rate this
    0

    Comment number 108.

    Bankers, investment brokers - nothing more than loan sharks in saville row suits. "Alright Greece you can't keep up with your payments at 2500% so we're coming round to take your TV sofa, and everything else".

    Financial services do not create wealth, they merely make profit from the debt of others - nothing more than vampires - the rich get rich everyone else gets shafted

 

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