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Rolf Campos, Professor, IESE, University of Navarra

Pure interest

Fri, 23 Apr 2010 08:34:35 +0000 Published in La Razón (Madrid)

At the time of writing, all indications are that the negotiations being conducted by the EC, the ECB and the IMF with the Greek government will come to fruition. Fresh money will be lent to Greece at a lower interest rate than it is currently paying in the market. In the last week, both the spread paid by Greek sovereign debt over German sovereign debt and the price of credit default swaps have risen sharply. The probability of a Greek default has increased in the opinion of investors in sovereign debt markets. Is the fact that European neighbors are lending at below-market financing costs to Greece a gift? In principle, this is not necessarily true. The loan differs from a sovereign bond. The loan, unlike a bond, carries restrictive conditions that seek to modify the Greek fiscal accounts so as to give greater guarantees of repayment.Therefore, one would expect the interest to be lower, in the same way that a commercial loan becomes cheaper with the existence of collateral or guarantees. However, the real reason for loan is self-interest. All euro countries are involved and have something to lose in the event of a Greek default, either because their banks are heavily exposed to Greek debt or for fear of contagion and a rise in the cost of their own sovereign debt.