Current bailout of Greece approved, but this is not the end of the story

21 Feb 2012 by Jim Fickett.

The Associated Press reports that the bailout of Greece currently on the table was finally approved after a 12-hour meeting:

After more than 12 hours of talks, the countries that use the euro reached an agreement early Tuesday to hand Greece euro130 billion ($170 billion) in additional bailout loans to save it from a potentially disastrous default next month.

The deal is expected to bring Greece's debt down to 120.5 percent of gross domestic product by 2020 — that's around the maximum that the International Monetary Fund and the eurozone consider sustainable.

But a confidential analysis circulated at the meeting suggests that the “sustainable” debt load scenario is an optimistic one. To put it bluntly, Europe has to pretend Greece is having a liquidity problem but there is, in fact, a very good chance that Greece is insolvent. The Financial Times reports:

A “strictly confidential” report on Greece’s debt projections prepared for eurozone finance ministers reveals that Athens’ rescue programme has veered off track and suggests the Greek government may need another bail-out once the second rescue agreed this week runs out.

The 10-page debt sustainability analysis, distributed to senior eurozone officials last week but obtained by the Financial Times on Monday night, finds that even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of the new €170bn bail-out. …

“Prolonged financial support on appropriate terms by the official sector may be necessary,” the report said, a clear reference to the possibility that bail-out funds may be needed indefinitely.