Rumors and Bailouts

Story Highlights:

• Rumors abound concerning Greece’s state of financial affairs, along with some talk about Greece exiting the euro. 
• EU officials determined last Friday that Greece would likely need nearly €30 billion of additional financing for 2012 as well as adjustments to its current bailout loan.
• We find the chances Greece suddenly leaves the euro unlikely, as EU officials have shown willingness to prevent a currency exit from any country.

In today’s Greek debt drama, rumors have been a consistent plot device. For example, last week, citing “unnamed” Greek government sources, German newspaper Der Spiegel reported Athens was considering leaving the euro currency. A powerful charge indeed.

What’s more, Standard & Poor’s, citing its belief Greece will likely have trouble meeting its deficit targets and may have to restructure, dropped Greece’s credit rating again to B from BB- on Monday. This all might seem very similar at first glance to this drama’s first act a year ago. The key difference? Now, the EU and IMF have already extended funds and have a direct stake in the outcome. Thus, EU finance ministers met last Friday to discuss the current state of Greece’s affairs. As a result, EU officials expect Greece to need nearly €30 billion of extra financing for 2012 as well as adjustments to its current €110 billion bailout. Interest rates on the current bailout loan will also likely be lowered and loan maturities may be extended.

As for Greece exiting the euro, Greek and EU officials have publicly denied all claims surrounding that possibility. Eurozone finance minister Jean-Claude Juncker didn’t mince words, calling it a “stupid idea.” Plus, EU officials have shown, through policy and otherwise (like the EFSF and ESM), that they are willing to work together to prevent such an outcome—well aware that a disorderly euro exit could spark broader issues for the whole region.

Greek officials also likely realize that if they were to abandon the euro, any new Greek currency would very likely drop precipitously from the get-go, possibly harming the country further. But if Greece stays with the euro (likely), bailout funds to finance its debt exist and are available at rates well below what the market would charge, with Germany and France picking up most of the cost until 2013 and likely beyond. If Greece does eventually need to restructure its debt in some way—and increasingly likely outcome—they can do so within the eurozone member and still reap the benefits euro membership provides. Simply, while the euro has its drawbacks (amply illustrated by debt crisis), it also carries numerous benefits that are hard to duplicate without the common currency.

So while we don’t dismiss the possibility of Greece leaving the euro, the likelihood of a Greek exit happening anytime soon seems very small in our view. As we’ve said, the EU and IMF, as well as Greek leaders, have simply spent too much real and political capital bailing out Greece and enacting harsh austerity measures. Instead, it seems more likely most rumors represent political wrangling—Greece’s 2010 bailout was given harsher terms than Portugal’s bailout last week, and Greek leaders seem upset at this perceived discrepancy. If that was indeed the motivation of Spiegel’s anonymous Greek sources, it seems to have worked—the EU and IMF are now willing to renegotiate more amenable Greek bailout terms. It’s hardly a deux ex machina, but it certainly moved this Greek drama’s act’s action along.