Money for nothing?

The decision this week by eurozone finance ministers to disburse their countries? 5.8-billion-euro share of the sixth loan installment for Greece will no doubt have some people in Europe wondering whether good money is being thrown after bad. Two years into the crisis and Greece appears to be in a worse position than when it started despite receiving billions of euros to keep it afloat. Perhaps eurozone taxpayers would be justified in wondering whether their money is being frittered away.

The impression among some Europeans seems to be that Greece is taking the money and wasting it, just as it did with EU funds in the past. It?s very easy to see why some people might think this given that Greece?s deficit this year will be only marginally lower than in 2010 despite 12 months of austerity, its debt load heavier and many structural reforms still pending. When one of the members of the coalition government ? New Democracy ? opposes one of these reforms (the labor reserve scheme for public sector workers), Europeans could be forgiven for thinking that their taxes are being thrown down a bottomless pit.

The superhuman effort by Greek politicians to give the impression that Athens is unworthy of any assistance means many in the eurozone see the bailout as help for a country that doesn?t want to be helped.

However, this overlooks the fact that the bailout mechanism is not a Ferris wheel of altruism, which takes cash from one part of the euro area and dumps it in another. If we view honesty and transparency as values in the EU, then we should be clear about what the bailout costs Greece and where the money goes.

The language attached to the Greek packages (bailout, aid, financial assistance, for example) often gives the impression that bundles of euro banknotes are arriving in Athens from other parts of the eurozone in cardboard boxes stamped with a red cross and that this cash is never to be returned. The reality is somewhat different. Greece?s eurozone partners are lending this money, not gifting it.

Shut out of international markets, the Greek government is borrowing from Germany, France and the others rather than from banks and investors that would normally buy its bonds. An agreement struck earlier this year means that this money is being lent at a reasonable rate and that the maturity of the loans has been extended to 10 years with a grace period of 4.5 years. The initial interest rate of some 6 percent was cut to about 3.5, which is a significant concession from countries like Italy that have been hit by crisis contagion. Italy has seen its yields rise to more than 7 percent over the past couple of weeks. If this high borrowing cost continues, Italy?s participation in the scheme would make little sense.

There is, of course, a flip side to this. For example, Germany borrows at less than 2 percent, meaning it can make a small but tidy profit from its part in the program.

According to European Commission figures (Table 1) Germany contributed 8.4 billion euros during the first year of the emergency loan agreement (May 2010 ? March 2011). Only France provided more, at just under 9 billion euros. Based on a rudimentary calculation involving all the disbursements for the first year being added together and charged at a rate of 3.5 percent, France and Germany earned about 300 million euros each in interest over the 12 months. An extra 300 million euros flowing into the public coffers of France or Germany may not make a huge difference to either of those two countries but these are sizable sums for Greece.

To put the interest repayments in perspective, Greece earned about 400 million euros in June for selling a further 10 percent stake in OTE telecom ? one of its few salable assets ? in June. Using the same basic calculation as before, Greece will pay a total of almost 1.4 billion euros in interest for all the eurozone loans it received during the first year of the bailout. This is roughly equivalent to what the government plans to earn from the emergency property tax levied on all homeowners in Greece this year.

It should therefore be clear to everyone that as favorable as the borrowing terms are, they still leave considerable work for Greece ? a country that has gone through three years of negative growth ? to do so it can repay its loans.

Then there is the question of how the bailout money is being spent. Again, the impression is often created that Greece is being unfairly rewarded with ?cheap? money despite failing to get its act together. The country is continuing to spend much more than it earns in revenues but its large deficit is not just down to the slow pace of public sector reforms, the worsening recession has deeply affected the revenues side of the equation as well.

However, Greece?s inability, for whatever reason, to get its public finances on track does not change the fact that the bulk of the money Athens is borrowing from its eurozone partners is going toward repaying foreign banks, investors and institutions and only about a fifth is being spent on public sector salaries and pensions.

Peter Tchir of the hedge fund TF Market Advisors recently produced an analysis ? based on Greece?s deficit and who holds its debt ? of where the money Athens receives is likely to go (Table 2). Here?s what he found: ?In the end less than 19 cents [out of every euro] of the bailout are going to allow Greece to continue its overspending. About 23 cents goes to Greek institutions, though at this point, all of that is held by the ECB, so it is not fully benefiting Greece. Eighteen cents are going to the ECB directly and 40 cents are going to banks and insurance companies outside of Greece. So at least 58 cents of every bailout euro is going outside of Greece, and depending on how you treat the repo agreements, that number could easily be 70 cents.?

Tchir?s assessment seems to support the argument put forward by a number of economists that the Greek bailout is by and large a recycling of money from eurozone taxpayers to European banks, which also helps buy everyone time ahead of a possible default by Greece.

This theory is only emphasized by the fact that just days after Greece is due to receive its 8-billion-euro loan tranche this month, it has to meet two major bond maturities: one for 1.2 billion euros on December 19 and another for 4.6 billion euros on December 29. In other words, Greece will pay out a total of 5.8 billion euros to its lenders this month, which is exactly the same amount that it is borrowing from the eurozone.

As self-serving as that may appear on the part of its eurozone partners, Greece is in a position where it cannot survive without these loans until a better solution is adopted. At least for now, the two sides are bound together as they hurtle through the current uncertainty. As we wait to see where we?ll end up, one doubt should be removed from our mind: In Greece?s case, there is no such thing as money for nothing.

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