Winners and losers
Now that the EU, the IMF and Greece have come to terms on a three-year, 110 billion Euro bailout, let’s take a look at who are the winners and losers.
The EU is contributing 80 billion Euros, at an interest rate of 5%. Many of the member states of the EU who will put up the money will make a profit, as long as Greece is able to pay the interest and re-pay the principal. Countries such as Germany, France, the UK and Belgium will be able to borrow at a cost of about 3.00% to 3.50%, and so they will earn a premium of 1.50% to 2.00% on their contributions, or somewhere in the one to 1.5 billion Euro range per year. Thus, put them in the winners’ column.
According to the Bank for International Settlements, European banks held US$193 billion of Greek Government bonds as of the end of 2008. TD Waterhouse estimates that the French banks hold US$79 billion, followed by the German banks with US$45 billion and British Banks with US$15 billion. The European banks that did not sell their holdings of Greek bonds, but had marked down their values to reflect market prices, will record significant gains as prices recover. If prices bounce back by 20%, thee banks collectively stand to gain US$25 to $30 billion. Put them in the winners’ column as well. Their respective governments also benefit because they will not have to bail out these banks. Double winners!
These paper gains undoubtedly will lead to significant bonus payments for the senior executives (the banking “super stars”) who run these banks. Let’s assume that bonuses will run at about 20% of the capital gains – US$5 to $6 billion. Add the bankers to the winners’ column.
Speculators who sold credit default swaps (CDSs) on Greek bonds and/or bought these bonds last week (it would be interesting to find out who these speculators were) will profit handsomely as the prices of CDSs decline and bond prices recover. Hooray for these speculators (the casino continues to thrive) – add them to the winners’ column.
Speculators who sold short Greek bonds or bought CDSs on these bonds last week will have made the wrong bets, and they can’t even blame Goldman Sachs. Gambling always has its winners and losers. Put these speculators in the losers’ column. (I wonder if any of them will lose their jobs.)
The successful speculators will now turn their attention and attacks to Portuguese and Spanish bonds, driving down their prices and pushing up their yields. This will put pressure on the Governments of Portugal and Spain to resort to more drastic fiscal measures, and will lead to capital losses for holders of this debt or sellers of CDSs on this debt. But these might be temporary losses, except for the citizens of Portugal and Spain who will bear the burden of spending cuts and higher taxes.
Finally, there is Greece. As Eric Reguly pointed out in today’s Globe and Mail: “For Greece, the price is a program of tough spending cuts and tax increases.” These measures will both prolong the recession in Greece and intensify its severity. Unemployment rates will rise sharply and real incomes will continue to decline. (The Great Recession might become the Great Depression in Greece.)
New figures from the Greek Ministry of Finance predict that GDP will fall 4% this year and an additional 2.6% next year (both are probably very optimistic forecasts). Growth in later years is expected to be modest at best.
Greece is the biggest loser.
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.