March 19, 2010, 2:04 PM ET.
The IMF: What a Deal for Greece!
Prime Minister George Papandreou has been dropping not-so-subtle hints that Greece may seek aid from the International Monetary Fund, as nothing appears on offer from the European Union. This despite widespread fear among Europhiles that an IMF bailout would be a humbling show of weakness for the common currency. (Germany, not incidentally, appears to be warming to the idea of someone else writing the check.)
But Mr. Papandreou may have another reason to go to the IMF: It’s a lot cheaper.
Greece has two slugs of long-term debt coming due this spring, €8.2 billion in April and €8.5 billion in May. These days, the market expects Greece would have to pay around 6.36% on a 10-year bond, more than twice what Germany pays. Mr. Papandreou and his finance minister have lately been on a whirlwind tour complaining about those spreads.
But we calculate (more below) that if Greece gets, say, €10 billion from the IMF, it can expect to pay about 2.70% interest, at current rates.
In other words, a savings in interest costs of €365 million a year. To put that in context, Greece is hiking taxes on cell phones and gas to bring in €400 million.
Admittedly, this is a rough estimate. Here, for our loyal readers, are some fine points:
The IMF operates a “quota” system, assigning to each country a figure corresponding to its economic heft. Greece’s is 823 million Special Drawing Rights, or €927 million.
A €10 billion loan would be nearly 11 times Greece’s quota, and flirting with maximum amount the IMF disburses. (Iceland, which melted down calamitously, got about 12 times its quota.) If Greece needs a lot more, it may have to find pieces of it elsewhere.
The interest rate is based on the IMF’s rate of charge, currently 1.26%. That’s what a country pays on the principal up to three times its quota. For anything more, the rate rises by two percentage points to 3.26%. For a €10 billion loan, the weighted average works out to 2.70%. (Details
here, for the curious or the insomniac. See page 16.)
If Greece doesn’t pay back the loan in three years, it gets another percentage point tacked on to the amount above three times quota. That could kick the effective rate up to nearly 3.5%, but it wouldn’t be immediate. Greek leaders can pretty much consider that someone else’s problem.
Would the Germans or the French, if they agree to a bailout, give Greece a better deal than the market is charging? Doesn’t look likely. French Finance Minister Christine Lagarde said earlier this week she’s not interested in arbitraging Greece’s interest rates. Berlin has been similarly dismissive of a below-market deal.
http://blogs.wsj.com/brussels/2010/03/1 ... or-greece/
