Will Germans accept a Greek debt reduction?

Greece’s international creditors are coming ever closer to the realisation that they may have no choice but to accept lightening the country’s colossal debt burden if its shattered economy is ever to be fully rehabilitated.

In possible and much-needed good news for the debt-stricken country, Greece’s creditors, including the IMF and the Eurogroup, are reportedly moving closer to accepting a deal that would see Greece’s total debt reduced, provided the country meets its austerity targets set by the Eurozone’s financial leaders.

Major European economies, particularly Germany, have long resisted the possibility of incurring losses on bailout loans to Greece and other troubled Euro nations, but the issue seems to be on the agenda again after Jeroen Dijsselbloem, head of the Eurozone ministers’ finance group, said in a recent visit to Athens: “If Greece fully complies with its commitments, then we will be ready to do more to help it. We will meet sometime before the summer of 2014 to examine what more Greece might need, always under the condition that the targets that have been set are achieved”.

Dijsselbloem also mentioned he was optimistic that Greece could finally start to see the light at the end of the tunnel in escaping it’s dreadful six year long recession. “I hear positive signals about the investment climate, business climate; and I think that hopefully, over the course of next year, we will once again see the start of economic recovery throughout the eurozone, but certainly also in Greece.”

The statements came as Greek banks received the latest €7.2 billion installment of eurozone money to recapitalise them and save them from being completely nationalised. The latest installment almost completes the total payments of €50 billion promised from the European Financial Stability Facility rescue fund.

European leaders are beginning to realise, however, that more might still need to be done. The IMF’s managing director, Christine Lagarde, said that Greece’s total debt, projected to reach a frightening 185% of GDP this year, would remain high well into the next decade, but that the target was to reduce that percentage to 110% of its GDP by 2022.

Measures to help Greece meet this target could include “official sector involvement” – code for writing off debt, as Greek finance minister Yannis Stournaras confirmed during Jeroen Dijsselbloem’s recent visit to Athens.

“Our goal is to produce a primary surplus by the end of the year,” he said, referring to the surplus that the government can achieve before debt repayments. “We want to do that so that we can ask for the appropriate measures to be activated by the Eurogroup to bring the debt down. Dijsselbloem repeated that this was something the Eurogroup would consider. He verified our plans.”

The issue of debt forgiveness is still a particularly thorny one – while all of Europe undoubtedly wants to see its troubled members such as Greece and Portugal come out of the financial quagmire and finally into prosperity, doing so at the expense of German taxpayer money is not considered a viable option by many Germans. It’s not just a question of ethics, as many Germans feel that opening the Pandora’s box of debt forgiveness will lead to an unsustainable domino effect, an opening of the floodgates, so to speak – for if Greece are (albeit partially) forgiven, what’s to stop Cyprus, Portugal or Spain from requesting similar eliminations of debt? Why is it fair that Greece receive relief while the other troubled nations do not?

The real issue, then, at the heart of Greece’s inability to repay its debt to its international creditors, is the fact that it simply has not been able to get its economy going again to produce enough money to repay the monumental debt. The issues plaguing their economy and potential for real, productive growth – a morbidly excessive public sector, a non-functional fiscal and taxation system – have not yet been fixed, and until they are and Greece manages to increase its productivity per unit of labour, to the point where it can compete with other EU nations such as Germany, then it will probably struggle to meet the repayments unless it is granted partial debt forgiveness by the IMF and the Eurogroup.

Written by Brendan Wilson, 3 June 2013
photo credit: European Council via photopin cc

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