Greek Borrowing Costs and Potential Bailout

According to Reuters Greek borrowing costs hit a record high on Tuesday April 19, 2010. That day Greece sold 1.95 billion Euros worth of 3 month Treasury bills on Tuesday paying a high yield of 3.65 percent. Greece needs to be able to borrow 10 billion Euros in the month of May and may be needing assistance of up to 80 billion Euros in the next few years. This recent treasury auction has fueled speculation that perhaps as early as this week Greece will tap a 40-45 billion Euro aid package from, fellow EU member countries as well as the IMF, in order to finance its debt. This will undoubtedly have a drastic effect on the EU and the Euro. German Chancellor Angela Merkel will be put in a tight spot as she will have to face a public which is opposed to a bailout of Greece, while also making good on her promise to help provide aid to the ailing country. What will likely happen is that during negotiations on the final aid package Germany and other EU member states will try to push Greece off on the IMF hoping for increased IMF funding of the bailout. This approach also has its problems as it will show that the EU is unable to help itself and must rely on an outside body like the IMF that may impose strict austerity measures on Greece and possibly on other EU member states. This news comes as the IMF is proposing new taxes on banks and financial institutions in its member states. This reflects the high levels of borrowing and stimulus spending during the recent recession. Taxes on financial institutions will be put into a fund or simply placed in the IMF to provide for bank bailouts in the future, although the money raised will not necessarily be enough to fund widespread future bailouts. Increasing taxes on these institutions will also make them less competitive in the world market and could increase their chances of failing in the first place. A bailout of Greece will also set a precedent that might encourage other troubled EU states like Portugal and Spain to ask for EU and possibly IMF assistance. An increase in the amount of bailouts for EU member states will take a drastic toll on the Euro and could lead to dynamic and fundamental shifts in the Euro-Zone.