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If Greece’s debt dam breaks, who gets wet?

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The 16 countries that share the euro single currency have agreed they will help Greece out if it needs. So far so good. But only now is the nitty-gritty of how member states will go about paying for their contributions being hammered out. And suddenly things are getting a little complicated.

Italy announced on Tuesday it would have to issue government bonds — known as BTPs –  to raise funds for its part in any Greek assistance. 

Under the agreement finalised by euro zone members on Sunday — by which they will provide about 30 billion euros to Greece if needed, and the IMF a further 15 billion euros — Italy may be called upon to disburse about 5 billion, a figure proportional to its economic weight in the euro zone. Germany, the European Union’s biggest economy, would have to provide a little over 8 billion euros. 

If Italy, which already has national debts in excess of 100 percent of GDP, issues more debt to raise money to help Greece get over its debt problems (Greece has a debt-to-GDP ratio of 120 percent),  then, in theory, the yield on Italian bonds is likely to rise as investors factor in the increased risk. And since almost all members of the euro zone have severe budget deficits (and therefore little free cash), potentially all of them are going to have to issue more debt to raise the funds to pay Greece to overcome its even more serious deficit problems. It’s spreading the risk around.

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