Second Bailout of Greece Would Be Disastrous for Europe: Think Tank

The European Union (EU) should not provide a second bailout to Greece because, among other things, by the year 2014, nearly two-thirds of Greek debt will be owned by taxpayers, according to Open Europe.

Open Europe (OE) is an independent think-tank based in London and Brussels that comments on EU affairs.

“A second Greek bail-out package would only increase the political and economic cost of the crisis, without providing any real solutions,” OE said.

“Considering Greece’s poor growth prospects and increasing debt burden, the country is likely to default within the next few years, even if it gets some breathing space through a second bail-out.”

Rather, OE proposes, the EU should be planning for an orderly default in Greece.

OE argues that another bailout (on top of the 110-billion euro agreed to last year), would become excessively costly to European taxpayers.

“Official sector (taxpayer-backed) loans are gradually replacing private sector loans,” the think tank stated.

“We estimate that today each household in the eurozone underwrites 535 euros in Greek debt (through loan guarantees). However, by 2014 and following a second bailout, this will have increased to a staggering 1,450 euros per household. The cost to European taxpayers of what looks like an inevitable Greek default will therefore increase radically in the next few years, making a second bail-out far more contentious than any of the previous eurozone rescue packages.”

Raoul Ruparel, an economic analyst at OE, warned: “a second Greek bail-out is almost certain to result in outright losses for taxpayers further down the road because, even with the help of additional money, Greece remains likely to default within the next few years. Another bailout will also increase the cost of a Greek default, transferring a far bigger chunk of the burden from private investors to taxpayers.”

Ruparel further warned that additional loans to Greece would exacerbate existing tensions between the wealthier and poorer nations in Europe.

“Taxpayers in richer countries resent underwriting foreign governments’ debt, while citizens in the eurozone’s south are growing increasingly hostile to EU-mandated austerity measures,” he added.
“How this tension will play out in future is anyone’s guess.”