August 25, 2011
The €109bn second bail-out for Greece is practically dead on arrival. The dispute between Finland and other eurozone member states over its collateral deal with Athens is the latest setback. The package is already undermined by the limited scope of private sector participation, while Greece is groaning under the burden of meeting its fiscal targets. Even if the Finnish dispute is resolved, the package will not prevent a default by Greece: two-year Greek bonds now yield 46 per cent.
The bail-out package has one overriding flaw – it was designed more to help European banks maintain the fiction that their exposure to Greece was secure than to provide relief for Athens. Even bankers, however, are coming around to the view that the centre cannot hold and are starting to write down their Greek exposure. The collateral dispute may hasten that trend by driving a coach and horses through the convention that new debt does not take priority over existing debt.