Will Germany accept debt relief for Greece?

A year ago Greece was close to leaving the Eurozone. The German Finance Minister Wolfgang Schäuble was pushing hard in this direction and had already secured some of his cabinet and Eurogroup collegues on board. But the German chancellor Angela Merkel intervened at the last minute, because she felt that a Grexit would send a terrible message to the outside world.

Now, a year later, the fundamental Greek problem still has not been resolved. But for many months it has no longer been top of the agenda, replaced by the migration/ refugee crisis for the EU.

In the meantime, Greece has passed the legislation to introduce the reform package the three institutions (Eurozone, ECB and IMF) called for. Whether the reform measures will be implemented despite fierce domestic opposition , the future will tell. But the institutions have indicated their willingness to pay out some billions (perhaps €9bn) of the 3rd rescue package totalling € 86bn. agreed last year.

One difficulty still has to be overcome, namely whether Greece should be offered debt relief. The IMF has asked for substantial relief for quite some time, threatening to walk away if the two other institutions don’t go along.  The IMF even asked for a straight hair-cut arguing that otherwise the debt sustainability of Greece was no longer guaranteed and that under these circumstances it could not participate in the financing of the country without violating its statutes.

Germany has always opposed the IMF demand on the basis that a hair-cut would be a direct violation of the no bailout clause and for legal reasons alone not acceptable. Lately, however, the German position has started to soften. Why this change?

I see several reasons:

  • The German Finance Minister and Chancellor understand reality and agree with the IMF in principle regarding Greek debt sustainability. However, they are defending  the validity of the Maastricht treaty and therefore do not accept an outright hair-cut, but only debt relief by lengthening the (already rather long) maturity of the debt and lowering the interest rate even further.
  • The German public has long accepted that the financial aid to Greece will never be paid back in real terms. It leaves the modalities of structuring the debt relief (hair-cut or changing maturity and interest rate) to the government.
  • The German coalition government wants the IMF to continue being part of the financiers of Greece because of its proven experience and ability to put more pressure on Greece to introduce ‚structural reforms’. As long as the IMF does not insist on an outright hair-cut, Berlin will go along and accept other debt relief measures.
  • All parties hope that Greece might be able to access the capital market next year, if the 3rd rescue package works well. All other Eurozone members that have had to be bailed out so far (i.e. Ireland, Spain, Portugal, Cyprus) have left the rescue programme and have partly accessed the capital market again. Should Greece be able to follow, this could be sold as a convincing sign that the rescue of the Eurozone was very successful.

The situation of the migrants/ refugees has calmed down. But it remains fragile. The EU-Turkey pact could come to an end quickly, if Turkey does not implement the measures considered to be essential by the EU before introducing visa-free travel for all Turkish citizens. So Chancellor Merkel still has

enough problems to worry about (including the ongoing quarrels with the CDU’s  Bavarian sister party the CSU) before the next federal elections in September 2017. Greece therefore must not become an important and pressing point on her agenda again.

How flexible she and her cabinet are ready to be between now and May 24 when the Eurogroup next meets is the critical question for Greeks and they remain wary.

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