Brussels blog

Greek prime minister George Papandreou, right, with his counterparts at Wednesday's summit

Thursday’s early-morning deal on a new €130bn Greek bail-out is different in magnitude and in kind from the July €109bn programme it replaces, but in one respect they’re very similar – European officials have had a hard time explaining what, exactly, the money is for.

The one thing they have announced is that €30bn of it will go to so-called “sweeteners” to convince Greek bondholders to accept 50 per cent haircuts on the face value of their bonds.

How this would work has yet to be negotiated, but in the July plan, such sweeteners were used to create a collateral pool for new, gold-plated Greek bonds that could be used in a bond swap programme. In order to convince bondholders to trade in their current bonds that are about to come due for new bonds that don’t come due for 30 years, these new bonds needed to be extra safe. The collateral “sweeteners” were the means to do that.

How is the remaining €100bn in the new €130bn Greek bail-out going to be spent? A little detective work after the jump.

The template to work off of is the July deal. That €109bn included €35bn in “sweeteners”, and the remaining €74bn was divided into three portions: €20bn went to recapitalise Greek banks; €20bn went into a new bond buyback programme; and €34bn went to actually running the Greek government.

Several officials have told Brussels Blog that the bond buyback programme has been nixed. So the remaining €100bn will be divided in two: some will go to recapitalise Greek banks (which will take a painful hit from the 50 per cent haircut, since they are the single biggest owner of Greek bonds), and the rest will go to run the Greek government.

The European Banking Authority’s country-by-country analysis of European banking needs says Greek banks will need €30bn in recapitalisation. The first €110bn Greek bail-out, agreed back in May 2010, included €10bn for bank recapitalisation, and thus far has only been used to help out Proton Bank, a small lender with just 31 branches. Proton got a €250m capital injection. So that means the new package must have about €20bn for bank recaps in it.

That leaves €80bn for running the Greek government. But that’s more than double the €34bn provided in the July deal, and raises some interesting questions that at this point may be unanswerable. Namely: why is so much more money needed?

One reason could be because Greece’s deeper-than-expected economic slowdown means their annual deficits will be bigger. But the recently-completed troika report – not a public document but obtained earlier this month by the FT – argues that because of all the new austerity measures Greece has put in place, the only additional money needed to finance Greece’s deficit will come this year, and that’s “only” about €2bn (see page 95 of troika report). For 2012, 2013 and 2014, the troika uses the same numbers as they did in July.

The culprit, then, must be the changing nature of the bond-swap programmes. In July, the programme essentially wiped off the books €54bn in bond repayments that would have come due during the three years of the bail-out programme, since those bonds were to be exchanged for new bonds that wouldn’t be repaid for 30 years.

Although the new bond swap hasn’t been negotiated yet, the troika must be figuring that there won’t be much (if any) delaying of payments. Instead, bondholders will just get new bonds worth about half their current holdings, and they’ll be due at the same time as the original bonds.

According to data provided by Re-Define, an economic consultancy, there are €88bn in bonds due between 2012 and 2014. Cut that in half (50 per cent haircut) and you get €44bn. Add that to the €32.7bn in deficits the troika estimates Greece will have over those same years, and the €2bn extra for 2011? You get €78.7bn. That’s pretty close to the €80bn in the bail-out, and that’s our best guess at where the money goes.

One other interesting thing to note:

The troika’s debt sustainability analysis – another non-public document that the FT has obtained – does some calculations of what Greece would need if there were a 50 per cent haircut. Although it doesn’t break down the numbers, it shows that the additional bail-out financing need through 2014 is €98.6bn (that correlates with the €100bn that’s actually in the new bail-out).

But the chart also shows Greece will need another €14.9bn from 2015-2020 – years that are not included in the bail-out agreed on Thursday. That would mean a third bail-out for Greece will be needed somewhere down the line. Whether European leaders were aware of this when they signed the deal on Thursday remains unknown. It’s pretty clear their constituents haven’t been made aware of it, though.