The Haircut War: Tensions Worsen Between Berlin and European Central Bank

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However, the central bankers' doomsday scenario isn't convincing, at least not among experts. "The ECB's position on Greek debt restructuring is untenable," says Hans-Werner Sinn, head of the Munich-based Ifo Institute for Economic Research. According to Sinn, it is entirely up to the central bank as to whether it agrees to accept the bonds as collateral for providing Greek banks with liquidity.

"The ECB makes its own rules," says Thomas Mayer, chief economist at Deutsche Bank. He also points out that it isn't true that Greek banks would lose access to central bank funds in the event of a debt restructuring. If, for example, old Greek bonds were exchanged for new securities issued by the European bailout fund, they would be "completely acceptable to the ECB," says Mayer. "Besides, Greek banks own large amounts of foreign assets, which the central bank could also accept as collateral."

Clemens Fueset, an Oxford economics professor and member of the independent economic advisory council to the German Finance Ministry, is also sharply critical of the ECB announcement. "It just isn't possible that the rehabilitation of Greece could fail because of such a technocratic argument," he says. "This is a scandal."

Fueset characterizes as "ridiculous" the European central bankers' fear that their reputation could suffer if they continue to supply Greece with funds. He even uses the words "rather insolent" to describe the behavior of ECB President Trichet and his colleagues in recent weeks.

Trichet and his colleagues also face criticism for having added large numbers of toxic securities to their own assets in recent years.

An Extremely Dangerous Development

Economists agree that Greece will not emerge from its crisis without a debt restructuring. "To become competitive again, the country would have to reduce prices and wages by 20 to 30 percent," says Ifo President Sinn. This would correspond to the devaluation that occurred in Germany in the early 1930s as a result of the emergency decrees of then Chancellor Heinrich Brüning. "This sort of thing works in theory, but in practice it leads to the brink of civil war."

The development is extremely dangerous for the ECB. If it hopes to keep faltering Greece afloat with new government loans, it will need the consent of Germany, the biggest financial contributor to the community. But how does it expect to get it if no one in Germany has any faith in its strategy anymore?

As a result, a rethinking of the ECB's approach seems to be taking shape -- not in the bank's Frankfurt directorate, which is stubbornly adhering to the anti-restructuring doctrine, but at its most important branch, the Bundesbank, only a few kilometers farther north.

Last week Jens Weidmann, the new president of Germany's central bank, expressed his views on the subject in the Frankfurter Allgemeine Zeitung. And to ensure that no one would overlook it, Weidmann uttered a sentence at the beginning of the interview that Trichet would delete from any document: "The Bundesbank is not opposed to a debt restructuring per se."

Weidmann is a member of the ECB's governing council, a body which is set to meet next week. It's likely to be a lively session.

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• Part 1: Tensions Worsen Between Berlin and European Central Bank
• Part 2: 'ECB's Position on Debt Restructuring Untenable'