Rescuing the Greek economy could require a €150 billion bailout over the next three years, according to Goldman Sachs, but this would be politically impossible for European leaders to swallow.
In a note to clients, Goldman's chief European economist, Erik Nielsen, said that the €45 billion bailout currently on the table is not large enough to cover Greece's borrowing needs.
After the recent surge in Greek borrowing costs, Nielsen believes IMF officials are now leaning towards a fully funded rescue package that will keep Greece from having to tap the money markets until its economic health has improved.
"On my numbers, a one-year fully funded programme needs to provide a minimum €50-55bn; an 18-month programme will require some €75bn, and a three-year programme a minimum €150bn. I think the latter number is out of reach even for the present political environment of generosity, so the debate is between €55bn and €75bn," wrote Nielsen.
"I suspect that some haggling is now going on between the IMF and the eurozone on the burden sharing of a bigger programme, but I rather doubt that the Europeans can do more than the already announced €30bn for the first year. If so, I suspect that the IMF will have to settle for something like a 12-month fully funded programme worth a total of €50-55bn, or could
it be an 18-month programme worth some €80bn?"
On Monday there was a surge in the yields charged on Greek government debt, an indication that the financial community is anticipating a debt default. Some analysts argue that investors who hold Greece's bonds should share in the pain, through a significant reduction, or "haircut", in the amount they get back from the Greek government.
Talks between officials from the IMF and European Union are ongoing. Greece needs to arrange a rescue package quickly as it needs to raise €8.5bn to repay bonds that mature on 19 May. But there are concerns that Germany may be unwilling to support the bailout unless Greece agrees to deep cuts in public spending and structural changes in its economy.