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New Open Europe briefing: The second Greek bailout - Bad for Greece, bad for eurozone taxpayers

01 Mar 2012

Press Release: IMMEDIATE

1 March 2012


Key points

  • Of the total amount (€282.2bn) that is entailed in the various measures now on the table to save Greece – through the bailouts and the ECB – only €159.5bn, or 57% will actually go to Greece itself. The rest will go to banks and other bondholders.
  • Under recent proposals, the total level of budget cuts Greece is expected to undergo stands at a massive 20% of GDP by 2013. Historically, no country has ever gone through such a large level of fiscal consolidation – successful or otherwise – especially without the option of currency devaluation. For example, the extensive fiscal consolidation seen in Ireland during the 1980s and 1990s totalled ‘only’ 10.6%.
  • The debt write-down offered to Greece is far too small to allow Greece any chance of recovery. Immediately following the restructuring, Greece’s debt to GDP will still be 161%, a reduction of only 2% compared to where it is now. The country is highly unlikely to meet its debt targets by 2020. This means that combined with the poor growth prospects due to continuous austerity, Greece will almost inevitably need either another bailout in three years’ time, or be forced to default on its outstanding debt.
  • At the start of this year, 36% of Greece’s debt was held by taxpayer-backed institutions (ECB, IMF, EFSF). By 2015, following the voluntary restructuring and the second bailout, the share could increase to as much as 85%, meaning that Greece’s debt will be overwhelmingly owned by eurozone taxpayers.
  • This means that in the event of a likely default, a huge chunk of the losses will fall on European taxpayers, potentially leading to significant political fallout in countries such as Finland, the Netherlands and Germany.
  • Given the sizeable debt relief needed in Greece, a fuller coercive restructuring would have been a simpler and more effective option from the start. Even at this late stage it still presents a viable option and is the only hope of putting Greece on a sustainable path while still keeping it in the eurozone – although even that may not be enough.

For more information on the methodology or calculations in this paper please contact the author Raoul Ruparel on +44 (0) 207 197 2333, +44 (0) 757 696 5823 or at

Click here to read the briefing online:  


Greece will receive another €230bn under the second bailout – €130bn in direct funding and the rest from the voluntary restructuring accepted by private bondholders (see box). But of this, only around 63% (€144.3bn) will actually end up with the Greek state and therefore the Greek people, with the rest going to banks and other private bondholders to cushion the blow of the complex private sector involvement (PSI) scheme.

Where is the second bailout spent?

Within bailout programme

€130 billion

‘PSI LM Facility’ (Bond sweeteners for private creditors)

€30 billion

Bond Interest Facility (EFSF bonds to pay off accrued interest)

€5.7 billion

Bank Recapitalisation Facility

€50 billion

Greek government

€44.3 billion

PSI from bondholders

€100 billion

Additional funding outside the bailout

€50.2 billion

ECB Credit Enhancement Facility

€35 billion

ECB forgoing profits on Greek bonds bought under SMP

€12 billion [1]

NCBs forgoing profits on Greek bonds in their investment portfolio[2]

€1.8 billion

Retroactive interest rate cut on first Greek bailout[3]

€1.4 billion

In addition to the cash entailed in the second bailout, the eurozone – and therefore eurozone taxpayers – will also make a further €50.2bn contribution to attempt to contain the Greek crisis. Of this only €15.2bn, or 30%, will go directly to Greece.[4]

We estimate that a large chunk of the money, €50bn, will go towards recapitalising Greek banks, which will likely need to raise capital amounting to between €36bn and €46bn to meet the European Banking Authority’s requirements. Previous estimates from the EU/IMF/ECB troika, which have been as low as €23bn, have recently been shown to be far too optimistic. [5]

Therefore, of the total amount that is entailed in the various measures now on the table, only 57% (€159.5bn) will go to Greece itself. While this is still clearly a sizeable amount of money, it does not represent a ‘good deal’ for the country. This is for a number of reasons:

The targets are wholly unrealistic and risk political fallout: The level of budget cuts which Greece needs to institute are unprecedented – relative to both successful and failed cuts taken elsewhere in recent history.[6] Under the current plan the Greek budget will have been cut for seven years in a row. As the OECD has pointed out, under recent proposals the targeted cumulative fiscal consolidation (overall budget cuts) in Greece by 2013 is a massive 20% of GDP.[7] In comparison, the massive fiscal consolidation seen in Ireland during the 1980s and 1990s totalled 10.6%. One of the key reasons for its success was that the Irish government was still able to combine it with some currency devaluation, an option not open to Greece.

The latest programme commits Greece to 150,000 public sector job cuts over the next three years. Proportionately, as a share of population, that is the same as cutting over 800,000 jobs from the UK public sector, far more than current UK plans and at a faster rate. Greek public workers and unions have no intention of giving in without a fight. The political and social impact of attempting these cuts is unknown, but the indications given by the recent widespread riots and rise of fringe parties in the polls do not bode well.[8]  

The austerity measures are killing growth prospects: Figures released on 14 February show that the Greek economy contracted at an annualised rate of 7% in the fourth quarter of 2011, worse than expected, after the contraction slowed in the third quarter. Meanwhile, provisional data for January 2012 suggest that budget revenues were over €1bn short of expectations. Compared to January 2011, revenues were meant to have increased by 8.9%, instead they declined by 7%.[9] 

Somehow the latest debt sustainability analysis (DSA) still expects Greece to return to positive growth by the end of next year and manage average real GDP growth of 2.6% from then until 2020.[10] It is unclear where this growth will come from. Domestic demand is likely to be depressed for some time as unemployment rises and lending remains frozen while Greek exports will be constrained by high wage costs, low productivity and, most of all, an overvalued currency. 

The private sector deal is wasting money: For the €100bn which the PSI raises almost €86bn in funding from the bailout goes towards making the actual debt exchange happen. In addition the EFSF will have to provide €35bn in assets to the Greek banking sector to use as collateral with the ECB following the bond swap.[11] As we have argued for some time, the attempt to reach a voluntary agreement with the private sector has wasted a huge amount of time, has been overly complex and resulted in a debt write-down much smaller than is needed (see below).

The write-down is too small: As was highlighted by the recent damning leaked DSA, conducted by the EU/ECB/IMF Troika, the level of debt reduction offered by this plan is far too small. Immediately after the restructuring, we calculate that Greek debt is still likely to be around €351bn, or 161% of GDP. This marks a miniscule reduction of 2% of GDP, owing to the €86bn in bailout funds which will need to be paid out during or in the immediate aftermath of the PSI to ensure it runs smoothly.[12]

By 2015, Greece will probably still have a debt to GDP of around 145% (€316bn) – and even that could prove optimistic.

In 2020, under the best case scenario, Greek debt to GDP will be 120.5% – more or less where Italy is today. Not exactly a hugely positive result after a decade of adjustment and hundreds of billions in taxpayer-backed bailouts. Furthermore, any slippage in the sensitive reform programme (outlined above) could cause debt to remain at around 130%. A collapse in the programme as seen with the first Greek bailout would lead to a debt to GDP ratio of 160% by the end of the decade.


For reasons largely overlapping with the points above, this also represents a bad deal for taxpayers in the eurozone:

Transferring debt from the private to public sector without providing a solution: Debt is largely passed on from one group to another meaning that firstly, the actual level of reduction is minimal (see above) and secondly, a huge chunk of Greece’s debt will gradually end up in the hands of eurozone taxpayers.

At the start of this year Greek debt amounted to around €355bn (163% of GDP). Of this 36%, was held by taxpayer-backed institutions (EU/ECB/IMF - official sector).

Following the voluntary Greek restructuring and the second Greek bailout (around summer 2012) this is likely to change significantly. We expect that a huge 62% of Greek debt will be held by taxpayer backed institutions.

And by 2015, when all the instalments from the first and second bailout have been paid out, official sector lending could account for as much as 85% of Greek debt, meaning that only 15% of Greece’s debt will not be underwritten by eurozone taxpayers. 


Greece will probably need another bailout or default anyway: As is now widely acknowledged, even following this bailout and restructuring, another Greek default looks inevitable – the combination of a huge debt burden and poor growth prospects mean Greece will not be able to return to the markets to raise funding for the foreseeable future.[13]

Therefore, as the DSA admitted, Greece is likely to need at least €50bn to avoid a disorderly default in the second half of this decade. Given that in 2015 only 15% of debt will likely remain in the hands of the private sector, another €50bn of taxpayer-backed debt could mean that nearly 100% of Greek debt is owned by the official sector.[14]

Hugely increased cost to taxpayers of a future default: This also means that if Greece were to default in 2015, after the second bailout runs dry, a huge share of the cost would fall on eurozone taxpayers, while any remaining private sector creditors would be almost completely wiped out.

Given that the existing bailouts – which have involved loan guarantees rather than up-front cash – have caused so much resistance already, there could be massive political fallout in countries such as Finland, the Netherlands and Germany, when taxpayers realise that they will never see the cash they lent Greece ever again.


1) For more information, please contact the office on 0044 (0)207 197 2333 or Raoul Ruparel on 0044 (0)757 696 5823

2) Open Europe is an independent think-tank calling for reform of the European Union. Its supporters include: Lord Leach of Fairford, Director, Jardine Matheson Holdings Ltd; Peter Cruddas, CMC Markets Plc; Lord Wolfson, Chief Executive, Next Plc; Hugh Sloane, Co-Founder and Chief Executive, Sloane Robinson; Sir Stuart Rose, former Chairman, Marks and Spencer Plc; Jeremy Hosking, Director, Marathon Asset Management; Sir Henry Keswick, Chairman, Jardine Matheson Holdings Ltd; Sir Martin Jacomb, former Chairman, Prudential Plc; Lord Sainsbury of Preston Candover KG, Life President, J Sainsbury Plc.

For a full list, please click here:

[1] If eurozone countries decide to return all the money they receive from the ECB to Greece. Cited by Reuters, ‘ECB to forgo Greek bond profits under second package’, 20 February 2012:

[4] There is also the issue of the ‘Escrow account’ which Greece will have to keep stocked with enough funds to make 3 months’ worth of debt and interest payments. After the restructuring this is unlikely to be much (since all debt will be long dated and have low interest rates) but the Troika has made it clear that the money will have to come from Greece itself and will not be covered directly by the bailout.

[5] Cited by Reuters, ‘Greece sets bank recap via common shares with restrictions’, 26 February 2012:

[6] Policy Exchange (2009) “Controlling spending and government deficits:  Lessons from history and international experience”:

[7] OECD (2011), Restoring Public Finances, Special Issue of the OECD Journal on Budgeting, Volume 2011/2, OECD Publishing, Paris; (p.6)

[8] For a full discussion of these issues see, Open Europe, ‘The second Greek bailout: Ten unanswered questions’, February 2012:

[9] Cited by Kathimerini, ‘Dramatic drop in budget revenues’, 7 February 2012:

[10] See here for the full leaked debt sustainability analysis: This is the most recent version publicly available.

[11] Currently a large amount of collateral used by Greek banks at the ECB takes the form of Greek backed debt. This will no longer be eligible while Greece is in ‘selective default’. Additionally the assets of Greek banks will also be significantly reduced by the PSI. This money will provide them with new assets to use as collateral until they can source their own sustainably and repay/return these funds.

[12] Although the net saving from the PSI is still €14bn only around €4bn of this is likely to be realised immediately since much will be delivered via reduced future interest payments and delayed payments of debt.

[13] Even German Finance Minister Wolfgang Schaeuble has admitted the possibility of further aid to Greece. Cited by Irish Times, ‘Schaeuble concedes third Greek bailout is on the cards’, 25 February 2012:

[14] This obviously depends on whether the money replaces (pays off) privately held debt. If it only partially replaces this debt then it could have a further negative effect of increasing the Greek debt burden again. Ideally (according the eurozone plan) Greece would be running a primary budget surplus so that this extra funding could be absorbed without increasing the debt burden.

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