Eurozone deal: Greek default could still happen

Euro sculpture outside the ECB A Greek default has been averted but Andrew Neil is not sure about its future

So, after 13 hours of talks into the wee small hours of this morning (unlucky for them!), eurozone finance ministers finally reached an agreement in principle on a second Greek bailout, this one worth 130bn euro plus a 50%+ write-down of private lenders holdings of Greek sovereign debt.

Since it's less than two years since Bailout 1 of 110bn euro and things in Greece have gone from bad to worse, you might wonder why this second one will do any better. And you'd not be the only one doing the wondering.

A "strictly confidential" report prepared for eurozone ministers' eyes only but helpfully leaked in this morning' s Financial Times shows that Brussels fears Bailout 3 could be necessary. It warns that Greece is now in a recession so deep that reducing its debt might prove impossible.

Start Quote

I expect the eurozone will finally refuse to write that third cheque”

End Quote Andrew Neil Daily Politics and Sunday Politics presenter

At the moment, its cumulative sovereign debt is almost 170% of GDP. Under Bailout 2 it's meant to fall to 120% by 2020 (though nobody seriously expects that to happen). But the leaked brief says it could still be 160% in eight years' time.

The brief also says that forcing private lenders to take a bigger than expected haircut on their loans to Greece (in reality they could end up losing 75% of their loans) is likely to destroy confidence among private investors, making it impossible for Athens to borrow from the financial markets for the foreseeable future.

So it could be on the eurozone drip feed indefinitely.

Two other points that could undermine Bailout 2: it assumes a return to strong growth from 2014 onwards, which might not happen; and the massive privatisation programme that was meant to generate 50bn euro in revenues has been downgraded to 30bn euro - and won't start for five years.

No alternative

Given eurozone ministers knew all this before they met last night you might wonder why they agreed to Bailout 2.

I suspect it was because, despite all the tough words in the run up to the summit, they didn't want to risk a messy default and thought there was no alternative.

At most Bailout 2 buys some time (like Bail Out 1).

But nobody knows what the eurozone will do with that time (the time Bailout 1 bought has been largely wasted). On present likely projections, even the Brussels bureaucrats think there's every chance there will need to be a Bailout 3.

But if it comes to that I expect the eurozone will finally refuse to write that third cheque. A Greek default has been averted for now. But it could still happen.

Andrew Neil Article written by Andrew Neil Andrew Neil Daily and Sunday Politics

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  • rate this

    Comment number 55.

    The point is that they have just been given another £24,000 for every person in the country. This is on top of what they had already borrowed, so in effect, the Greek Government had borrowed more than £100,000 per person! To achieve what? The Greek people you speak of, are paying the price for their governments recklessness, that they were complicit in, by voting for them at every election!

  • rate this

    Comment number 54.

    #49. actually they are spending it on covering the extraordinary interest levels on their government bonds. Otherwise they have actually achieved a small surplus in recent months. Don't make cheap shots if you don't want to spend the time looking at the facts. I don't think you'd be saying that if you were typing in Athens without the money to heat your house.

  • rate this

    Comment number 53.


    "what on earth the Greek Government has been spending all this money, they did not have in the first place, on exactly?!!!"

    More public sector workers, golden pensions for them, the Olympics, more red tape, letting the rich off paying taxes.......

    No that was New Labour, but Greece did exactly the same.

  • rate this

    Comment number 52.

    Post 44 “If Greece brings back the Drachma…” Bring it back, devalue! First, tourism benefits! At the moment as Greece is locked into the Euro they can’t devalue, meaning 1 Euro= 1 Euro. A devalued Drachma will temp people to holiday in Greece as they would get more ‘bangs’ for their Euros.

  • rate this

    Comment number 51.

    A default is desperately needed. What a terrible legacy of bad leadership if Greece has to default in the next 2 years, with half a decade of unnecessary recession and higher debts than it had in 2010. The ECB should have been pumping liquidity into the euro zone in preparation for the credit crunch from a Greek default, accepted the shared devaluation, then looked to growth in the next 12 months.


Comments 5 of 55



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