The Real Reason Germany Wants Greece To Restructure Its Debt



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 rumours that Greece will have to restructure its debt, which Germany favours, 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 per cent of gross domestic product (GDP) to 10.5 per cent, while Lisbon’s was revised from 7.3 per cent to 9.1 per cent 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. rumours 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 favour 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 favourable 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.

While Germany is probably correct that restructuring on this private debt now will be cheaper than when Greece’s EU/IMF loan expires at the end of 2012, Berlin is thinking about political costs, not necessarily economic costs. The recent election results in Finland have put the eurozone bailout mechanisms, specifically the Portuguese bailout, in danger as a euroskeptic, right-wing, populist party — the True Finns — has seen a considerable rise in popularity and will likely enter government.

Merkel worries about a similar rise in anti-eurozone populism in Germany. The “Liberal Awakening,” a wing of governing junior coalition member the Free Democratic Party (FDP), is gaining strength even as the FDP has suffered several electoral setbacks in local elections under former party leader and current Foreign Minister Guido Westerwelle. The group’s demand is that private investors be involved in the ongoing eurozone rescue program, which means essentially shifting the burden of bailing out Greece from Germany’s taxpayers to Europe’s financial system. The FDP euroskeptic wing, or at least its populist approach, has many proponents in Merkel’s Christian Democratic Union and its Bavarian sister party, the Christian Social Union.

Politically, the Greek restructuring therefore comes down to putting a stop to rising populist movements in Europe. It would be simple to dismiss the rise of the True Finns in Finland as an occurrence on the margins. Within Germany and France, the two core European countries, no such electoral wins are yet discernable, although French presidential candidate and right-wing populist Marine Le Pen is polling well thus far ahead of 2012 elections. Nonetheless, it does not take the emergence of a new party to change policy. Leaders will respond to populist demands by attempting to reduce support for such movements and parties by adopting parts of the rhetoric themselves.

Economically, the Greek restructuring amounts to Europe’s taxpayers going up against Europe’s financial institutions laden with sovereign debt. Berlin is trying to make the argument to the financial institutions that if they respond favourably to a “soft” Greek restructuring — no more than a minor cut on interest rates, but a longer repayment schedule — then Germany will be able to hold the line against rising populist movements stretching from Finland to Germany and demanding greater investor participation in eurozone bailouts.

The trick, however, is to balance the restructuring in such a way that it does not negatively affect Europe’s beleaguered banks. European Central Bank officials have already expressed their scepticism of any restructuring. With Europe’s banks in dire shape, it is not clear that Berlin will be able to gain even a token concession.

This post originally appeared at STRATFOR, the world’s leading private intelligence firm. To get access to more intelligence from STRATFOR, click here.