The World from Berlin 'Greece Is Clearly in Need of Debt Restructuring'

The international ratings agency Moody's downgraded Greek debt to junk status on Monday, another reminder that the euro crisis isn't over. German commentators on Tuesday say that the European Union must quickly find a way to free Athens from its mountain of debt.
The international ratings agency Moody's downgraded Greek debt on Monday.

The international ratings agency Moody's downgraded Greek debt on Monday.


Financial analysts have been saying for weeks that the euro crisis isn't over. Even as the European common currency has risen against the dollar, due in part to strong indications from European Central Bank head Jean-Claude Trichet that he plans to raise interest rates this spring, debt concerns have not evaporated.

This week they landed back on the front pages. The ratings agency Moody's announced on Monday that it had downgraded Greek state bonds by three notches to junk-bond status. Moody's now rates Greek debt lower than that of Egypt and on a par with countries such as Angola and Mongolia. Yields on Greek bonds shot up, as did those of Portuguese and Irish bonds, reflecting concerns that downgrades could also be pending for those heavily troubled countries.

Yields for Irish bonds had already been high due to German Chancellor Angela Merkel's rejection of a demand by the incoming Irish prime minister, Enda Kenny, for lower interest rates on European Union rescue loans. But on Monday afternoon, Moody's indicated that a further downgrading of Irish debt was not imminent.

Growing Skepticism

Nevertheless, Monday's announcement places additional pressure on euro-zone leaders as they gather this Friday to discuss an extension of the current euro rescue fund beyond its 2013 expiration date as well as measures to more closely coordinate fiscal policy across the common currency zone.

The downgrade of Greek debt has little direct effect on Athens' finances. For now the country is being aided by EU rescue money. But it does indicate that skepticism is growing as to whether the country's strict austerity measures combined with European aid money will be enough to stave off a restructuring of the country's debt. Many point out that, even if Greece consolidates its budget to the degree its targets call for, sovereign debt in 2013 is still likely to be close to 150 percent of gross domestic product.

And Monday's announcement could have immediate negative consequences for a 36-month bond offering by Portugal, planned for Wednesday. Lisbon still wants to avoid making use of the EU rescue fund. After briefly climbing above $1.40 on Monday afternoon for the first time in months, the euro on Tuesday has begun to slide once again as a result of the news.

German commentators take a look at the euro crisis on Tuesday.

The center-left daily Süddeutsche Zeitung writes:

"Moody's has weighed in on Greek bonds just at the moment that Athens is asking its European partners for lower interest on EU rescue money, or for an increase in the period of the loans they have received. Who really believes the financial managers that the timing is coincidental and that they are acting independent of their own interests?"

"It would be wrong to interpret the downgrade as an indication that the country is on the brink of insolvency. Greece has gotten used to living with its 'junk' status. But the word 'junk' does not mean that there is no money there. All it means is that the probability that the country will be unable to pay its debts is at 17 percent ... Creditors, however, can still count on an 80 percent chance that they will get their money back."

The Financial Times Deutschland writes:

"European Union countries and especially Germany are in danger of committing the same mistake they did in the autumn of 2010. At the time, Merkel and Finance Minister Wolfgang Schäuble mistakenly believed that the situation on the financial markets was stable enough to push forward the establishment of bankruptcy proceedings for European Union member states. The misjudgement came back to haunt them -- not long later, Ireland had to make use of the rescue fund."

"Politicians cannot make the same mistake a second time. The fact that Europe's leaders are addressing fundamental problems and looking for solutions that might hold for longer than two months is certainly unobjectionable. But they should only do so once they can be sure that that effort will not worsen the acute problems faced by crisis-ridden countries."

"In the case of Greece, the EU should first and foremost look for a convincing way to reduce the country's substantial mountain of debt in the mid-term. Otherwise, investors will remain nervous."

The center-right daily Frankfurter Allgemeine Zeitung writes:

"Greece is clearly in need of debt restructuring. But even if the austerity program has the desired effect, the populace begins to pay their taxes and the government quickly moves forward with privatization plans, state debt will still be crushingly high. The current astronomical risk premium of 16 percent on three-year government bonds shows that the financial markets have long since begun to see debt restructuring as unavoidable. But politicians in Athens, Brussels and Berlin have made the topic taboo -- and they have unfortunately found an ally in the European Central Bank. In reality, however, politicians are once again more concerned with coming to the aid of their largest banks."

The conservative daily Die Welt writes:

"It is understandable that the Greeks are unhappy about the Moody's announcement. In the middle of a financial crisis, the government of Prime Minister Georgios Papandreou has hit his population with an austerity package more severe than any other in the industrialized world. But it is becoming increasingly clear that Athens has bitten off more than it can chew. Even if all the planned measures are introduced, the results likely wouldn't be enough to free the country from debt in the long term."

"One can't expect the Greeks to talk about such things publicly. It would only harm them, by making the markets even more mistrustful of their desire to reform."

"But one can expect candidness and honesty from the European Commission and the governments of those member states that will ultimately have to pay the bill. The solution cannot be that of loosening the conditions attached to the €110 billion loan granted to the Greeks by European countries, the European Central Bank and the International Monetary Fund almost one year ago. It is, to be sure, a step that is unavoidable. But if that is the extent of the solution, it will merely make it unduly simple for Athens to take advantage of such aid. Furthermore, it would be a fatal signal to other countries in the euro zone."

-- Charles Hawley
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