The Greek "Bank Rescue Fund" Goes up in Flames

Mish Shedlock  |

Greek bank shares were down the 30% limit again Wednesday, with some bank stocks not fetching any bids at all.

The Plunge in Bank Shares Drag Down Broader Market

Inquiring minds may be interested in the HFSF Rescue Fund

The HFSF allegedly "recapitalized" Greek banks by buying bank shares. Those shares are now practically worthless. The HFSF fund could have made a ton by shorting them instead. That €50 billion wasted bailout is a small part of what Greek taxpayers have to pay back. The new grand total is now €326 billion. The €326 billion figure includes a third €86 billion bailout (yet to be negotiated), but does not count any additional funds needed to recapitalize banks.

The €326 billion also does not count €120 billion or so in Target2 liabilities, but let's ignore all of that and assume €326 billion will be the final grand total. Greek GDP in 2014 is about €216 billion. That's going to drop as well, and likely for years to come, but let's also assume that won't decline. Let's further assume an interest rate of zero percent on the €326 billion. And finally, let's assume Greece can magically achieve a surplus of 3% of GDP forever into the future, long enough to pay back the "bailout."

Payback Assumptions

€326 billion total bailout

No additional money needed to bailout banks

Target2 Imbalance of €120 billion and rising does not matter

Greek GDP will remain at €216 billion

Interest rate on the bailout will be 0%

Greece can immediately achieve a surplus of 3% of GDP

Greece will hold that 3% surplus for as long as it takes to pay back €326 billion

Every penny of Greek debt surplus will go to pay back creditors

3% of €216 billion is €6.48 billion. At €6.48 billion per year, it would take Greece 50 years to pay back €326 billion.

But here's the thing: None of those assumptions is true. The interest rate will be small, but it likely won't be zero. Greece won't come close to 3% surplus, and 100% of the surplus won't go to the creditors.

The only possible favorable condition in the mix is GDP. Greek GDP will eventually rise above €216 billion, but that will take years. In the meantime, interest expense accrues, adding to the total amount that needs to be paid back.

At 2% of GDP rate of payback (€4.32 billion per year), again assuming 0% interest, it would take Greece 75 years to pay back the "bailout".

At 1% of GDP (€2.16 billion per year), it would take 150 years. And rest assured Greece will not hold a surplus for 50 years or 100 years. 

3% of GDP - 50 Years 

2% of GDP - 75 Years 

1% of GDP - 150 Years

If Germany insists on the terms they just crammed down Greece's throat, there is zero chance of success even at an interest rate of zero percent.

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