FT: How much would a third Greek bailout cost?

11/2/2015

By Peter Spiegel

One of the unmentioned problems looming over the current Greece standoff is the fact that Athens will need a third bailout, regardless of what happens in a week’s worth of Brussels meetings that start on Wednesday. Eurozone officials say that both Yanis Varoufakis, the new Greek finance minister, and his boss, Alexis Tsipras, have acknowledged that in private meetings.

Just four months ago, it appeared that Athens wouldn’t need another full-scale EU bailout and would be given a line of credit instead. That’s because at the time it appeared the Greek government was making progress in convincing private credit markets to fund its fiscal needs. That is no longer the case.

Eurozone officials are understandably reluctant to estimate the size of another Greek bailout – and not just for political reasons. Trying to guess how much Athens will need without digging through Greece’s books is a fraught affair, especially since tax revenues have reportedly begun to dry up and it’s been months since the troika did their last full-scale analysis.

But that shouldn’t prevent Brussels Blog from doing some spit-balling. According to a very quick-and-dirty back-of-the envelope estimate, a third Greek bailout could run as much as €37.8bn if Varoufakis’ plans are adopted in full. Are Greece’s 18 eurozone partners prepared to cough up that kind of money in the current environment?

The baseline for our estimate is the last bailout review, even though it occurred nearly a year ago. You’ve got to start somewhere. At the time, the IMF estimated that Greece’s current bailout was already €12.6bn short. So we’ll start with that figure.

The first thing you have to add to that is the €1.8bn remaining in the EU’s portion of the current €172bn rescue. If the Greek government is hell-bent on allowing the bailout to expire at the end of the month – as Tsipras has promised – that money disappears. So a new bailout rises to €14.4bn.

The new government has also insisted it will halt a bailout-driven privatisation programme. If we assume a new Greek bailout will cover the next three years (as the last two bailouts did), that’s a loss of €8.5bn, as this chart in the European Commission’s last bailout report illustrates. So the price tag rises to €22.9bn.

Next, you have to figure in new fiscal targets. Under the current bailout, Athens was expected to post a primary surplus – taking in more than it spends, when debt interest payments aren’t counted – of 3 per cent of gross domestic product this year. In 2016 and 2017, that target rose to 4.5 per cent. Varoufakis has suggested that, as part of the new government’s anti-austerity drive, he would prefer something closer to 1-2 per cent. Let’s split the difference and go with 1.5 per cent.

Have a look at this IMF chart:

According to these estimates, this year’s 3 per cent surplus was expected to total €5.6bn; cutting that to 1.5 per cent means the programme will be €2.8bn short. For next year, the 4.5 per cent target was to bring in a €8.9bn surplus. Cutting that to 1.5 per cent lops off another €5.9bn. And in 2017, the 4.5 per cent surplus was to bring in €9.3bn. Lowering that to 1.5 per cent means another €6.2bn gone.

Taken together, that’s €14.9bn. Because Greece was projected to be running an overall deficit in those years (when interest payments are factored in) that shortfall would presumably need to be financed through more bailout cash. That brings the total needed for a new bailout to €37.8bn.

The new Greek government has argued some of those new debts could be lowered by decreasing the amount Athens has to pay in interest on its bailout loans every year. According to the same IMF chart, Greece will pay €30bn in interest alone over the next three years. But can Athens really negotiate a cut in that figure? It would appear not.

Tsipras has already said Athens intends to pay back in full the IMF and ECB, which holds huge quantities of Greek bonds. So there will be no restructuring of either of those debts. And it’s widely seen as impossible to restructure (yet again) the limited amount of debt in private hands, since two defaults in four years would make it unlikely for Greece to be able to raise money again in the private credit markets in our lifetime. So that leaves one source of debt to be restructured: bailout loans from the eurozone.

But as this IMF chart shows, Greece doesn’t actually owe the EU anything in 2015 or 2016, and that likely continues to 2017 because during previous negotiations, eurozone lenders agreed to a hiatus on interest payments into the next decade. So there doesn’t appear to be any savings to be had on debt interest payments at all.

So that’s where we get €37.8bn. That’s also a best-case scenario, since it includes healthy tax receipts and solid economic growth that were forecast during the last bailout review – which we now know are both lagging those projections.

If there’s any reason why Varoufakis’ plan is likely to get a rude reception among his fellow finance ministers it’s because of that price tag. German officials have already indicated the privatisation programme is a red flag, and it’s not clear everyone is willing to lower the fiscal targets. So at the end of the negotiation, a third programme is likely to be significantly less than that. But how much less? That’s where the fight will likely be.

One last possible curveball: both the Greek government and the European Commission have made noises about kicking the IMF out of a future bailout. The IMF is the most hated of the troika institutions in Athens, and the Commission has long coveted running eurozone bailouts on its own. Jean-Claude Juncker, the new Commission president, is said to be particularly adverse to IMF participation.

So what if the IMF were shut out of a third bailout? Well, of the €28bn the Fund pledged as part of Greece’s current bailout, they are still due to distribute €16bn through next year. If the IMF were to be kicked out, the eurozone would have to find that €16bn on their own – bringing their price tag to €53.8bn.

A German-led group of creditor countries has already said the IMF is needed in any Greek programme, arguing the Fund has the needed expertise to run such a complicated bailout. But their wallet helps, too.

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