The Never-Ending Crisis Greek Debt Restructuring Looks Inevitable

Europe's sovereign debt crisis is threatening to take on new dimensions as Portugal becomes the third euro-zone member to ask the EU for a bailout. Germany is opposed to giving Greece any more financial aid, meaning that Athens will have little choice but to restructure its debt.

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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Wolfgang Schäuble hates being disturbed on Saturday afternoons. That's when Germany's finance minister, a huge soccer fan, likes to watch the games of his favorite team, Bayern Munich, on TV.

On Saturday April 2, Schäuble's job obligations spoiled his fun when he was forced to take part in a conference call. Waiting on the line were his colleagues in other important euro-zone countries, including French Finance Minister Christine Lagarde, European Monetary Affairs Commissioner Olli Rehn and Jean-Claude Trichet, president of the European Central Bank (ECB).

The reason for the disturbance was a crisis that had already ruined many of Schäuble's weekends in recent months -- even more so than Bayern's crummy playing this season: Once again, it was about the state of the European monetary union and the issue of how financially troubled member states should be assisted.

After a year full of financial woes, cash shortages and near-bankruptcies, the situation has become anything but reassuring. In fact, in recent weeks, the euro crisis has gotten even worse.

Following months of insisting it would not need a bailout, debt-stricken Portugal has now asked for help from the European Union's euro rescue fund. In a television address last Wednesday, Portuguese Prime Minister Jose Socrates announced that his caretaker government could no longer deal with the pressure from the financial markets by itself. Before making the announcement, yields on the country's sovereign bonds had climbed to almost 10 percent, a new record.

Indeed, on the whole, those in charge of rescuing the euro in Brussels and Europe's capitals have done a poor job. So far, almost all of their expectations have been disappointed. And things have continuously gotten only worse.

At first, people thought that the European Financial Stability Facility (EFSF) -- the temporary rescue fund that will be replaced by the permanent European Stability Mechanism (ESM) in 2013 -- had been equipped with enough resources to calm the markets, and that no one would actually draw on its help in any case. But, now, two countries, in the form of Ireland and Portugal, have asked for support, and no one can say for sure that they will be the last.

Admission of Failure

Even worse, however, is the situation in Greece. Last year, the European Commission, the ECB and the International Monetary Fund (IMF) assembled a special rescue package for Greece in order to help it avoid defaulting on its loans. But, since then, things haven't gotten much better.

After a year of financial adjustments and reforms, prices for Greek sovereign bonds are lower than they were when the rescue effort was launched, and their yields have reached record highs. Indeed, the country's government has almost the same credit ratings as it did 12 months ago.

This development can be seen as a vote of no confidence by investors in the EU's rescue measures. Players on the financial markets simply don't believe that Greece will be able to stand on its own two feet any time soon. And now there is the risk that something will happen that the Europeans already tried to prevent last year, namely that Greece will be forced to restructure its debt.

Despite all the denials, there is a growing realization that a so-called haircut can no longer be avoided. SPIEGEL reported last week that the IMF is putting pressure on Athens to restructure its debt. And it's not just the IMF that is pushing for Greece to take a haircut: Among euro-zone finance ministers, too, support is growing for the radical solution, which would involve holders of Greek sovereign bonds taking losses.

Last week, during a meeting of the European Commission, European Monetary Affairs Commissioner Olli Rehn told his colleagues that they shouldn't speak publicly about a Greek debt restructuring, but that a restructuring would have to be carried out in good time. If things really came to that, he said, it would be nothing less than an admission that the euro zone's approach to fighting the crisis had failed, at least in the short term.

Growing Deficit

The issue of restructuring Greek debt also came up in Schäuble's conference call. He and some of his colleagues expressed their unease about developments in Greece and voiced skepticism about whether the reform measures would ultimately succeed.

Their doubts are justified. Indeed, the most recent analysis by the European Commission, the IMF and the ECB on the issue of whether Greece will be able to refinance its debts by itself came to an alarming conclusion. The study found that the country's economy is contracting more than previously feared and that one of the main causes behind the contraction was the harsh austerity measures that the government has been forced to introduce in return for receiving outside assistance. As a result, the public deficit in Greece has climbed even higher than previously assumed.

The expert report also says that Greece's program for sorting out its finances has reached a critical phase. In order for the country to be able to handle its debt burden by itself, its economy will have to pick up and there must be an increase in the country's notoriously uncertain government revenues. But, at the moment, neither of these things is happening. During the conference call, some finance ministers very gingerly suggested that, given the situation, it might make more sense to let Greece restructure its debt.

"I'm not prepared to talk about that," ECB President Jean-Claude Trichet barked into the phone. If creditors grant Greece's request for a reduction in the amount it owes, he argued, the entire euro zone could face a crisis of confidence.

Impact on ECB's Profits

Trichet also warned that such a step could hit banks that hold a lot of Greek debt hard. Nevertheless, these worries did not prevent Trichet from announcing on Thursday an increase in the interest rate in the euro zone, thereby worsening the financial crises in the debt-stricken countries.

This is one reason why Schäuble thinks that Trichet's worries about the markets are exaggerated and lack credibility. What's more, he knows that Trichet's actions are driven by another motive, albeit one that he never openly admits: As part of its measures to bolster Greece, the ECB bought up several billion euros worth of its sovereign debt. For that reason, it is one of Greece's creditors itself and would therefore also be affected by a Greek debt restructuring. The ensuing write-downs would noticeably reduce the ECB's profits -- something Trichet would like to avoid at all costs during his final year in office as the bank's president.

In fact, Schäuble and his colleagues are getting increasingly angry with Trichet. As they see it, if Trichet is going to be so dogmatic about rejecting a Greek debt restructuring, then he has to explain how Athens is supposed to be able to raise money on the markets by itself as early as the start of 2012, as envisioned in the plan for sorting out its finances. The finance ministers argued in the conference call that that is nothing but wishful thinking.


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