German Chancellor Angela Merkel declined on Monday to categorically rule out a debt cut for Greece in a sign that she is keeping all her options open for tackling the euro crisis if she wins a third term -- as widely expected -- in the September 22 general election.
"I would explicitly warn against a debt cut," she told news magazine Focus in an interview published on Monday.
That's just a warning, and it falls far short of the categoric statement made by Finance Minister Wolfgang Schäuble on Sunday when he said that the euro-zone finance ministers had vowed that the first debt cut for Greece was a "total one-off, never again." There would be no repeat of the debt cut, Schäuble said.
Other politicians from Merkel's center-right coalition have also ruled out another debt cut, although European Energy Commissioner Günther Oettinger, a member of Merkel's Christian Democratic Union party, said it may happen. "A debt cut isn't an issue in the foreseeable future but one can't rule it out forever," Oettinger told Welt am Sonntag newspaper.
Schäuble himself had raised the issue of fresh funding for Greece when he told an election campaign rally last Tuesday that the country would need a third aid program in 2014.
Oettinger and Greek Finance Minister Giannis Stournaras came up with strikingly similar estimates for the additional funding required, with Oettinger talking about a "small double-digit billion sum" and Stournaras mentioning the sum of around 10 billion.
In her interview with Focus, Merkel only made an indirect reference to the Greek aid package that Schäuble had spoken of with such certainty. She said: "In 2014, as has been agreed, we will again address the question of how the debt level and the structural reforms in Greece are developing." Until then, Greece still had "a lot to do" and would have to "continue implementing its reforms forcefully," she added.
That's a view shared by Jörg Asmussen, the German member of the European Central Bank's directorate. "Repeated talk of a debt cut isn't helpful," Asmussen told German newspaper Welt am Sonntag. It distracts attention "from what needs to be done under the current program for budget consolidatuon and more growth."
Primary Surplus Doesn't Help Much
Asmussen pointed to a decision taken by the Euro Group, made up of euro-zone finance ministers, last November. "If the country achieves a primary budget surplus on a one-year basis, continues to implement the program fully and the debt level is still too high, the Euro Group will discuss new assistance measures," Asmussen said. He added that the numbers for the current budget year won't be available until spring 2014.
A primary budget surplus refers to the budget before interest payments on debt. In the first seven months of 2013, Athens did in fact acheve a primary surplus and also aims to keep the budget in surplus over the full year. If it does, Athens will have fulfilled a key demand set by its creditors.
But if interest payments are factored in, the Greek budget remains deep in the red. Greece's debt continues to grow because the economy is still shrinking. The Greek government expects the debt level to amount to 173 percent of annual GDP by the end of 2013 -- about just as high as before the country's first debt cut. That's why experts doubt whether Greece will be able to break out of this vicious circle if its creditors don't agree to a further debt reduction.
One suggestion made by the parliamentary group leader of Merkel's conservatives, Volker Kauder, is unlikely to work. Kauder proposed helping Greece with additional monies from the EU structural funds. But an EU task force has already been trying to find projects in Greece that would merit EU structural aid -- and it hasn't found many.
Given this backdrop, Merkel is right to aovid categorically ruling out a debt cut. To be sure, she told Focus that such a move could trigger a "domino effect of uncertainty that could end up with the readiness of private investors to invest in the euro zone going back to zero again."
And it's true that even talking about a new debt cut could cause the bond yields of Greece and the other struggling euro countries to rise again. After all, creditors may demand a risk premium to compensate them for the possibility that they won't get all their money back.
One Way Out: Longer Debt Maturities
But no one is calling for a blanket debt cut for Greece that would also affect private sector investors. Any new cut would primarily hit Greece's sovereign creditors, meaning the other euro-zone member-states. That would mean that for the first time in the euro crisis, German taxpayer money would be irretrievably lost. With Germany in the middle of an election campaign, it's a highly explosive issue.
A face-saving compromise for Greece could involve prolonging the duration of the loans to Greece, or reducing interest payments or even scrapping interest payments if certain conditions are met. That would avoid a formal debt cut, and it would enable Greece's creditors to keep up their pressure on Athens to keep on reforming.
Stournaras, the Greek finance minister, raised this possibility in an interview with German business daily Handelsblatt. The message would be: The money for Greece isn't gone. The Germans just won't be getting it back for the time being.