The Never-Ending Crisis Greek Debt Restructuring Looks Inevitable

An April 1 demonstration in Lisbon against high unemployment and the government's austerity measures. Last week, Portugal became the third euro-zone member to ask for a bailout.

An April 1 demonstration in Lisbon against high unemployment and the government's austerity measures. Last week, Portugal became the third euro-zone member to ask for a bailout.

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Part 2: Germany Unwilling to Provide More Aid for Greece

The only other possible alternative to a controlled default for Greece is additional financial aid for the country. But Schäuble has already made it clear to Trichet that he is highly unwilling to grant the Greeks another round of help. Schäuble justifies his refusal with the argument that he would never get additional aid for Greece through the Bundestag, the lower house of Germany's parliament.

Resistance to providing Greece with any more help is particularly pronounced among members of the business-friendly Free Democratic Party (FDP), which governs in Berlin as the junior partner in a coalition with Chancellor Angela Merkel's center-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU). "In the interest of the German taxpayer, Greece cannot be allowed to receive even more money from its European partner countries," says Volker Wissing, an FDP politician who is head of the Bundestag's finance committee.

"If you subscribe to the faulty logic that you always have to help, then you will always have to keep making more payments," says FDP financial expert Frank Schäffler. "In doing so, the community of states opens itself up to blackmail -- not only from banks, but also from the countries it helps."

The opposition is also concerned. "In the light of the underlying economic data, Greece will not be able to survive in the medium term without restructuring its debt," says Carsten Schneider, budget spokesman for the parliamentary group of the center-left Social Democratic Party (SPD). He adds that it is no longer justifiable to use "taxpayer money to relieve banks and other private creditors by extending public loans to Greece."

Since other donor countries are hardly more willing to come to Greece's aid, Schäuble and his foreign colleagues more or less agree on where things should go from here: Although Greece's government cannot be forced to restructure its debt, no one can stop it from entering into voluntary talks on the issue with its creditors.

Barroso Sent to Lisbon to Whip Up Support

Even if the finance ministers can't force Greece to do anything, in the case of Portugal they considered a bit of pressure to be long overdue. They unanimously turned down the Portuguese request to receive a bridge loan without any conditions so that the country could survive the period until new elections in June.

Instead, the finance ministers decided that it would be much better for the Portuguese to follow the designated path of requesting assistance from the European Commission and the European rescue fund. But to receive any of this help, Portugal had to agree to certain conditions that the caretaker government of Prime Minister Socrates would have preferred to avoid. To bring the recalcitrant Portuguese in line, the finance ministers decided to send Jose Manuel Barroso, the president of the European Commission, to his home country to try to whip up support for their plan. Though he wasn't thrilled about it, Barroso went to Lisbon and spoke with representatives of both the government and the opposition.

Last Tuesday, the heads of Portugal's five largest banks informed Portuguese Finance Minister Fernando Teixeira dos Santos that they couldn't lend the government any more money. Bank executives told the government that things had gotten too risky, pointing out that they already had €14 billion ($20 billion) in sovereign debt on their books. On Wednesday, Barroso reported that the proud Portuguese had finally buckled and that the plan could go forward.

Conditions Unclear

Two days later, Portugal's formal request for aid arrived in Brussels. The finance ministers of EU countries, who were holding a meeting near Budapest at the time, instructed European Commission experts to evaluate the request for aid as quickly as possible.

On Friday, the finance ministers meeting in Hungary announced that Portugal would need €80 billion ($115 billion) in aid. But it is unclear which conditions will be attached to the aid package. The Portuguese have yet to allow any IMF officials into the country. The plan is to send a group of investigators -- or "mission" -- from the IMF, the European Commission and the ECB to Lisbon in the next few days to figure out exactly what the country's financial situation is. A plan for rehabilitating the country's finances should be developed by mid-May. Only when that is ready can money start flowing to Lisbon.

While the finance ministers are happy about the decision, others worry that the elections planned for early June could lead to attempts to renegotiate the rescue package. The same thing recently happened in Ireland, where the new conservative government in Dublin is still hoping to amend some of the conditions imposed on Ireland in return for aid.

Fears Turned Out to Be Justified

However, something that worries the Europeans even more is the possibility that Portugal won't be the last country to ask for a bailout. Belgium and Spain could also find themselves in dire financial straits.

On the positive side, Spanish Finance Minister Elena Salgado stressed that the risk premiums the Spanish government has to pay on its sovereign bonds have dropped 30 percent since the start of the year. And even on Wednesday, the day that Portugal threw in the towel, interest rates on Spanish bonds fell.

But, even so, many still think that Spain is at risk of falling into financial distress. Their pessimism is born out of bitter experience: So far, all of the fears during the euro crisis have turned out to be justified.

If Belgium and Spain really do run into financial trouble, it would present the other euro-zone countries with a whole new series of challenges. By then at that latest, EU finance ministers will have to deal with the issue of beefing up the rescue fund. Until now, they have been procrastinating on addressing the problem.

Taking the Euro Fund to Court

As of Monday, it won't be just EU finance ministers busying themselves with the issue of financial assistance for Portugal. It will also be Germany's highest court, the Karlsruhe-based Federal Constitutional Court. Markus Kerber, a constitutional lawyer and financial expert from Berlin, wants the court to issue a temporary injunction forbidding the government from agreeing to financially assist Portugal.

In a 37-page legal brief, Kerber say that if the court cannot bring itself to block the move, the danger will arise "that, after the Republic of Ireland has taken advantage of the 'European Stability Mechanism' and the Portuguese Republic has filed a request (for such aid), we can count on similar requests coming quickly from the Spanish, Belgian and even Italian governments."

Last year, Kerber and roughly 50 supporters filed a constitutional complaint against the euro rescue fund. He fears that the ongoing proceedings in Karlsruhe will become pointless if one country after the other seeks help from the rescue fund. "What is the Federal Constitutional Court supposed to rule on," Kerber asks, "if the majority of the money has already been paid out?"

Translated from the German by Josh Ward


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