The Real Reason Germany Wants Greece to Restructure Its Debt

Business Insider
April 27, 2011

Figures released April 27 by the EU statistics agency showed that Portugal and Greece both overshot their budget deficit targets in 2010.

These figures coincide with rumors that Greece will have to restructure its debt, which Germany favors, arguing that restructuring now will not be as costly as restructuring later.

Though this argument is probably true, Germany is more concerned with the politics than the economics of the Greek debt issue, as the sovereign debt crisis is fueling the spread of euroskeptic populism across Europe.

EU statistics agency Eurostat revealed in figures released April 27 that Greece and Portugal overshot their budget deficit targets in 2010. According to the agency, Athens’ budget deficit for 2010 was adjusted upward from 9.6 percent of gross domestic product (GDP) to 10.5 percent, while Lisbon’s was revised from 7.3 percent to 9.1 percent of GDP. The revision does not necessarily come as a surprise; both Greece and Portugal have considerable sovereign fiscal deficits they are attempting to address with severe austerity measures. As these measures are implemented, however, GDP declines, causing a rise in the deficit as a proportion of overall GDP. The revisions also mean that meeting the 2011 targets will be difficult, especially as both Greece and Portugal are expected to have a decline in GDP this year.

The release of these figures tracks the ongoing concern in Europe that Greece will have to restructure its debt — essentially default on some part of its commitments to investors in their current form — this year. Rumors about restructuring began to swirl earlier in April when German Finance Minister Wolfgang Schaeuble was quoted as saying Greece may indeed need to restructure its debt, then Citibank released a negative report, widely read by the investor community, on the same theme. Various German government officials have continued to bring up the idea, with the latest being Lars Feld, one of Chancellor Angela Merkel’s economic advisers.

The German argument in favor of restructuring is that it will be cheaper to restructure “sooner than later,” as Feld said in a Bloomberg TV interview April 26. Athens’ eurozone partners have already awarded it new conditions for its debt to the European Union and International Monetary Fund (IMF), with a lengthened repayment schedule and more favorable interest rate. The 110 billon euro (about $160 billion) loan, however, will by the end of 2012 account for about a third of total Greek debt, which was about 340 billion euros at the end of 2010. The rest of Greek debt is held by Greek banks and funds (about 80 billion euros), the European Central Bank (about 50 billion euros), and private banks and institutions. According to the latest data from the German Bundesbank, Germany holds just under 17 billion euros of Greek sovereign debt, the largest direct exposure by a eurozone country other than Greece.

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