Keeping Greece afloat and hoping for supply-side growth…

The agreement reached by the Eurozone leaders on 21 July does one great thing for Greece: it resolves its cash-flow problem, at least for the next few years. Unless something goes terribly wrong with the Greek economy, the new €109bn loan will see the country through its borrowing needs to 2014. Besides this, some €20bn of the new loan will be used by Greece to buy-back some of its maturing debt, with an estimated saving (reduction in its debt) of about €13bn. Another €13bn is expected to be saved by the ‘voluntary haircut’ included in the partial roll-over of privately-held debt, agreed with the Institute of International Finance. Additionally, the reduction in the interest rates charged on the eurozone loans and the extension of their maturity will also help, by slowing-down the spiralling growth of the Greek debt over the next 10-15 years. All in all, Greece has been offered an important lifeline involving also a small – but always welcome – reduction of its debt.