July 2010, Ronald Janssen
On May 9, 2010, a joint mission of the IMF and the European Commission concluded negotiations on a loan package to be provided to the Greek government. The amount of these loans as well as the volume of the adjustment effort that is to be delivered by Greece is staggering. In return for an (additional) 30 billion euro austerity program, Greece will receive 80 billion euros of European bilateral loans and 30 billion euros of IMF loans over the next three years. The view widely held in policy circles is that this loan package, even though it implies very tough cuts, will ultimately save Greece and its economy from financial market speculation.
This paper takes a closer look at the Greek adjustment program and arrives at the opposite conclusion. Three years from now, Greece will be facing an even higher debt burden. Meanwhile, jobs and economic growth will have been sacrificed. The only thing the rescue package really achieves is a major change in the ownership of debt. With Greek sovereign debt being transferred from the balance sheets of banks to the balance sheet of European governments, the real purpose of the entire operation is to save European banks by relieving them from holding debt titles upon which a potential default could be looming.