Greece is asking for a loan extension. What does this actually look like? Let’s say we borrow £100,000 over 25 years at an interest rate of 4% per year and with the intention of repaying a constant amount each year, which is the typical mortgage. The repayments needed can be calculated on an Excel spreadsheet as £6,401.20 per year.
Now let’s say we extend the loan period to 30 years. The constant repayment will be £5,783.01 per year. This isn’t much less than the 25 year amount, so the prospect of an extension is not that useful to the borrower. Furthermore, one could take the view that if the loan is looking risky, then the lender will want 5% to be the new interest rate, say, in which case the repayment would be £6,505.14 or actually more than the 4% over 25 years repayment!
Where does the money come from? Evidently it comes from Germans who work hard but accept a lower standard of living nevertheless. Greece is apparently in negotiations, but neither side in this has much room for manoeuvre. Watch this space!