The World from Berlin 'Soft Debt Restructuring Cannot Solve Greece's Problems'

Euro-zone finance ministers broke a longstanding taboo on Tuesday when they admitted that Greece might need to restructure its debt. German commentators agree that a "soft" restructuring would be a step in the right direction, but that it would not be enough to resolve the crisis.
An Athens clothing store announces it is going out of business. Debt restructuring for Greece is looking increasingly likely.

An Athens clothing store announces it is going out of business. Debt restructuring for Greece is looking increasingly likely.


Over the course of the financial crisis and the ensuing euro crisis, many new terms have entered ordinary people's active vocabulary, from "toxic assets" to "collateralized debt obligations," to more recently, "haircut" in the context of creditors taking a loss on their investments.

Now a couple of new terms look set to enter the common vernacular -- "soft restructuring" and "re-profiling," both used by Luxembourg Prime Minister Jean-Claude Juncker on Tuesday to refer to restructuring Greece's public debt.

Juncker, who heads up the Euro group -- made up of the finance ministers of the 17 euro-zone member states -- said that a so-called "soft restructuring" or a "kind of re-profiling" of Greek debt may be possible, but insisted he was "strictly opposed" to a "large restructuring" of Greek debt.

European Commissioner for Economic and Monetary Affairs Olli Rehn seconded the idea, saying "a voluntary extension of loan maturities, a so-called re-profiling or rescheduling on a voluntary basis, could be examined."

A re-profiling or soft restructuring could involve Greece's creditors voluntarily swapping short-term debt for longer-dated bonds, effectively giving Athens more time to repay its loans. It is seen as a less drastic move than forcing debtors to accept a "hard" debt restructuring in the form of a so-called haircut, which would involve them receiving less that the full value of their bond holdings.

'Costs Far Outweigh any Potential Benefits'

Juncker's comments followed two days of meetings to address Greece's plight. It was the first time that top euro-zone officials had indicated some sort of debt restructuring may be in store for Athens. Previously, the European Union had been adamant in its refusal to consider a partial Greek default for fear that it could destabilize the markets.

Juncker also said that, as a prerequisite for such a move, Greece would have to raise €50 billion ($71 billion) through the privatization of state-owned assets. At least €15 billion in assets are expected to be sold this year, he said. Greek Prime Minister George Papandreou said that an aggressive privatization strategy could cut his country's debt -- currently at 150 percent of Greek gross domestic product -- by 20 percentage points. He opposed the idea of a debt restructuring, however, saying that the Greek government and other euro-zone members "continue to believe that the costs far outweigh any potential benefits."

The euro zone appears to be split over the issue. On Monday, French Finance Minister Christine Lagarde voiced her opposition to such a plan. Ewald Nawotny of the European Central Bank has also spoken out against the idea.

Merkel on the Offensive

Juncker's comments come as the rhetoric in the discussion over how to deal with Greece's woes seems to be heating up again. On Tuesday evening, German Chancellor Angela Merkel blasted Greece  and other heavily indebted southern European countries in unusually sharp words, saying they needed to raise retirement ages and reduce vacation days.

Meanwhile doubts are rising in Europe over the efficacy of bailout packages put together for euro-zone countries struggling under mountains of debt. Attention in recent weeks has focused once again on Greece as it became clear that, despite €110 billion in aid granted to the country in 2010, Athens may still need more.

On Wednesday, the International Monetary Fund (IMF) gave a stark warning to Greece that it must sharply accelerate its reforms, otherwise efforts to sort out its finances would fail. "The program will not remain on track without a determined reinvigoration of structural reforms in the coming months," said Poul Thomsen, an IMF envoy who is monitoring Athens' economic progress, in one of the strongest warnings to the Greek government in recent months.

On Wednesday, German commentators take a look at the prospect of debt restructuring for Greece.

The Financial Times Deutschland writes:

"The lack of a favorable response (from the markets) shows that the currently favored 'soft' debt restructuring alone … cannot solve Greece's debt problem -- the relief it offers is simply too small. Nevertheless, it would be the right step. It would buy the Greeks and the other euro-zone members more time to solve the problem. But the decisive factor would be how they use this time."

"It cannot be expected that the Greeks themselves will do much more. Even if the government insists during their visits to Brussels or Berlin that they will try to economize even more, they have little hope of success -- the domestic resistance is too large."

"Rather than the Greeks, it will depend much more on the rest of Europe -- and above all on the Germans. Only if they make it clear that they are serious about rescuing Greece, and that they will not allow a 'hard' debt restructuring in the form of a partial devaluation of sovereign bonds, can investors on the financial markets recover confidence in Greece. The solution would also include further loans to euro-zone countries, provided the interest rates are not too draconian. That is the only approach that would offer the Greeks a realistic chance of getting themselves out of their misery."

The center-right Frankfurter Allgemeine Zeitung writes:

"The head of the Euro Group, Jean-Claude Juncker, spoke coyly about a 're-profiling' of Greece's public debt. Because nobody knows what that is, everyone can interpret the term the way they want to."

"But the question of what is understood under debt restructuring is more than just academic. A soft restructuring would have no negative consequences for creditors or debtors. That would be quite different from a forced haircut. The ratings agencies would regard the latter as the same thing as a Greek default. In that scenario, Greek banks would no longer have any chance of getting loans from other banks in the euro zone -- which is, incidentally, already the case in general."

The center-left Süddeutsche Zeitung writes:

"The R-word was long regarded as obscene within the EU. A debt restructuring for Greece … was impossible and was not going to happen, European politicians protested again and again. But like other previous statements, those lies have now caught up with them. Now creditors will make concessions toward Athens and extend their repayment terms, perhaps with lower interest rates -- even if Euro group head Jean-Claude Juncker is avoiding the R-word and talks of 're-profiling' instead."

"The history of the R-word is an admission that Greece cannot continue with its current course, despite the large euro-zone members' claims to the contrary. The country's economy will never grow strongly enough to allow it to repay all its debts. In order to make sure that the country does not sink even further into debt, it needs, on top of a tough austerity plan, relief -- even if that creates new problems. Some creditor banks will falter as a result, while some countries will lose money. But such losses are better than refusing to face reality, thereby running the risk of a massive meltdown."

The conservative Die Welt writes:

"The other European countries are demanding that Athens pursue even more stringent austerity measures and finally push forward privatization efforts vigorously. But those demands simply look helpless. How are they planning to put pressure on Athens, when all possible sanctions would harm them at least as much as they would the Greeks? In addition, the EU members are bitterly divided among themselves as to the wisdom of a debt restructuring for Greece or a new bailout. Although everyone knows that someone is going to have to pony up at the end of the day, one way or the other, all the countries are equally afraid of putting their cards on the table."

"That might seem politically expedient, because they want to postpone the moment of truth as long as possible or gain some other advantage. But playing for time and delaying the decisions comes with a price. It was precisely this tactic that made the previous rescue measures so incredibly expensive."

-- David Gordon Smith
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