Germany has a problem. Now that euro-zone finance ministers have agreed to grant Greece another two years to meet its budgetary goal of achieving a structural surplus of 4.5 percent, attention has turned to ensuring that the crisis-wracked country reduces its overall debt load. And the International Monetary Fund (IMF) proposal to slash publicly held Greek debt could cost Berlin up to €17.5 billion ($22.3 billion).
Even worse, such a loss could endanger German efforts to balance its own budget by 2014 -- and would make unwanted headlines in coming months just as Chancellor Angela Merkel enters the heart of campaign season ahead of general elections next September.
Berlin, not surprisingly, is opposed to such plans. "Without speculating, we should concentrate on other solutions," German Finance Minister Wolfgang Schäuble said on Tuesday in Brussels. His French counterpart Pierre Moscovici supports the German position.
The IMF believes that the only way Greece can reduce its sovereign debt to the target level of 120 percent of gross domestic product in the next decade is by way of another partial default. This time, however, it wouldn't just be private creditors who would lose out as they did in the debt haircut carried out this spring. A second such cut of Greek debt would force international creditors, Germany included, to write down a portion of the billions they have loaned Athens. A 50 percent default would result in Germany losing €17.5 billion of the €35 billion it has loaned Athens thus far.
It is partly for that reason that euro-zone finance ministers are in favor of extending by two years the deadline for Greece to reduce its debt load to 120 percent of GDP from 2020 to 2022. The difference of two years, they hope, would give austerity measures more time to produce budget surpluses, which could contribute to a paying down of the country's debt.
'A Bit too Ambitious'
But without a debt haircut, Greece still won't be able to meet the 120 percent target by 2022. According to the draft troika debt sustainability report, which has been seen by Reuters, without a partial default, Greek debt would comprise 144 percent of GDP in 2020 and 134 percent in 2022, assuming there are no further economic upheavals between now and then.
Schäuble himself on Tuesday said that cutting Greek debt to 120 percent of GDP "is likely a bit too ambitious for 2020." The country's debt load is forecast to hit a peak of 190 percent of GDP next year before it begins to fall as a result of austerity measures.
Still, for all the tough talk that has come out of Berlin in recent months regarding Greek reform efforts and aid tranche payments, Merkel and her conservatives would much rather give Athens more time than be forced to tell German taxpayers that billions in loans to Greece would never be paid back. Politicians in Berlin have long argued that Germany's support for beleaguered euro-zone countries has come exclusively in the form of guarantees, but a haircut this time would mean that, for the first time in the euro crisis, Germany would actually lose the money it pledged as backing. Conservative parliamentarian Norbert Barthle decisively rejects any talk of a Greek default. "We are not going along with that," he says. "And that means that a debt haircut is impossible."
A potential debt haircut, though, isn't Berlin's only problem. By giving Athens until 2016 to achieve budgetary consolidation targets originally scheduled for 2014, Europe has essentially committed to plugging a resulting €33 billion gap in Athens' finances. Schäuble wants to do all he can to avoid having to push yet another bailout package for the stricken country through German parliament. "We have to find other ways to close the gap without using" the bailout fund, Schäuble said on Tuesday.
Profiting from the Suffering
Just what those might be, remains unclear. But the German finance minister indicated on Tuesday that Berlin might be prepared to pass along to Athens the profits that Germany has made by lending money to Greece. Germany earned some €400 million on the first, €110 billion bailout package for Athens. With investors flocking to safety, Germany has been able to borrow money at extremely low rates on international financial markets whereas Greece has committed to paying a higher interest rate on emergency loans from its international creditors, including Germany. Profits from loans associated with the second, €130 billion bailout package stand to be even higher.
The daily Süddeutsche Zeitung cites sources within the government as saying that it could be damaging to Germany should the impression be created that some countries were profiting from the suffering in Greece. Still, even if Germany does send along its profits to Athens, it won't go far in filling the vast financing hole that has now opened up.
More important for Greece, however, is the payment of the next tranche of badly needed aid, worth some €31.5 billion. Athens has managed to keep itself afloat this week by selling €4 billion in short-term debt on Tuesday, a sale which was made possible by significant backing from the European Central Bank.
Euro-zone finance ministers plan to meet on Nov. 20 to once again address Greece's reform process and to determine if it has met all the prerequisites for additional aid. Just when a final decision might be made on a new Greek default, however, remains unclear.
With reporting by Severin Weiland