Analysis

The return of the Greek problem

15 Oct 2012
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Region: 
EU/Eurozone

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  • Although the ‘Eurozone question’ for Brussels has moved on to the details of banking union and the handling of a likely future Spanish bailout, Greece remains the most volatile part of the Eurozone picture, and it is about to come to boiling point again.
  • Greece is going to impose substantial further costs on its Eurozone peers – either in the form of an expanded bailout on revised terms, a debt write-down for other Eurozone sovereigns, or by leaving the euro and throwing the Eurozone into crisis.
  • This is because Greece’s debt burden is simply unsustainable. Yet of Greece’s creditors, only the ECB and Eurozone states are in a practical position to take losses on their various holdings. The ECB has refused any such losses. The only real question is how and on what terms Eurozone governments will choose to pay the Greek bill, and whether they can sell this choice politically.
  • As undignified as it might be, Greece is negotiating from a position that has a number of perverse strengths. As insurmountable as it is for Athens, Greece’s total debt is still less than 3.5% of Eurozone GDP. Politics aside, it can be sustainably written off. It cannot be sustainably paid back.

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