What Would a Greek Haircut Mean for Germany?

Spiegel
May 27, 2011

It's the worst-case scenario: Greece no longer able to get loans, with creditors having to wave goodbye to a chunk of their money. But what would it mean for Germany? Would the state have to bail out the banks again, and would private investors also suffer badly? SPIEGEL ONLINE takes a look at the likely consequences.

It may only be a small passage in the statutes of the International Monetary Fund (IMF), but it is the bottom line: An organization can lend money to a country only if it is certain the state will remain solvent for at least one year. Washington experts are increasingly doubtful that this minimum requirement can be guaranteed in the case of Greece.

The heavily-indebted state is due to receive a further tranche of its €110 billion bailout package -- one-third of which is provided by the IMF, with the other two-thirds coming from the European Union -- at the end of June. But if the Greek austerity and privatization measures do not meet the IMF's requirements, with the result that the fund decides not to release the payment, Greece could face the prospect of default.

Whether the euro-zone countries would take over the IMF's share in such a scenario is unclear. Which is why Greece's European partners are probably not too unhappy about the IMF's doubts. They function as a warning signal for Greece that the chips are down: Time to stop playing around.

In any case, the situation has led to another grim scenario, one which has been discussed on the financial markets for weeks, becoming more likely: Greece has so much debt that the state is hardly likely to ever be able to fully repay the money to its foreign creditors. Most, if not all, now accept that some form of debt restructuring will be necessary, and that this could involve reductions of up to half of Greece's debt.

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