The European Union has approved another round of bailouts for the Greek government, but it’s looking more like a short-term solution than a long-term fix. Initial market enthusiasm for the deal turned to uncertainty as details about the plan were given time to sink in.
News that the plan, reached in Brussels on July 21, won’t include a bank tax, initially prompted a surge in European bank stocks. But sentiment about the bailout cooled quickly, sending European stocks on a slide.
There is significant apprehension about the plan because it will allow Greece to default on part of its debt, despite extending new credit to the sovereign. The latest round of funding includes 109 billion euros in new aid from the E.U., ECB and IMF, with a 3.5% interest rate, a 10-year repayment grace period and a 30 year maturity.
Although the bailout won’t require a bank tax, banks are still going to take a significant hit. Banks holding Greek sovereign debt are likely to take losses of up to 21% on Greek bonds.
This latest bailout is unlikely to be the last, since it doesn’t include enough austerity measures to reverse Greece’s course. Even under conditions imposed on Greece in each of the bailouts, the Greek government is still spending far more than it brings in, so it is difficult to see how this latest bailout is anything other than a temporary measure staving off inevitable collapse.
The bailout package is projected to reduce Greece’s debt to GDP ratio to 140%, which is still far too high. By contrast, the gross U.S. debt to GDP ratio is projected to be in the high 90% range this year—high enough to put the U.S. at 12th highest ratio in the world.