The bailout burden

Euro zone bailout: Governments hope their 520 billion euro rescue of Spain, Portugal, Ireland and Greece will never be fully used. But if they are wrong, the rest of the euro zone would have to contribute about 7 per cent of GDP. While that's bearable for most, it would raise Italy's debt to 125 per cent of GDP. Initially, support pledged by euro area governments shouldn't have too severe an impact on member states’ finances.

The first part of the package comprises ¤80 billion of loans to support Greece. These are conditional, and would be fully drawn only over three years. But that figure is dwarfed by the ¤440 billion of guarantees that euro area member states have agreed to provide through a special purpose vehicle (SPV). With a bit of luck, these guarantees won’t be needed at all. The European Central Bank is hoovering up government bonds and lending unlimited funds to banks to keep markets functioning smoothly. So long as the plan works and the guarantees aren’t called in, the full ¤440 billion probably won’t need to be included in governments' debt-to-GDP ratios.

But this rosy scenario may change if weaker states fail to convince markets that they have their finances under control, forcing the SPV to swing into action. Germany could end up footing as much as ¤123 billion of the SPV’s commitments. France and Italy would cough up ¤92 billion and ¤81 billion respectively. This presupposes that all the euro area states — except Greece — could make good on their guarantees. If they couldn’t, the stronger countries would have to pick up the slack. The total bailout would then reach about 7 per cent of GDP, assuming Portugal, Ireland and Spain all fall by the wayside and including the ¤80 billion of Greek loans. Germany’s bill could reach ¤169 billion, France’s ¤127 billion and Italy’s ¤112 billion.

The additional burden may not be distributed evenly. The German government’s share could be increased by up to a fifth subject to parliamentary approval. Split the weaker states’ share equally between the remainder, and Italy’s debt-to-GDP ratio would rise to 125 per cent from a forecast 118 per cent this year. If the guarantees are ever needed, the euro zone crisis would enter a new phase.