POLITICS_ Why Germany refuses to write off Greece's debts

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Why Germany refuses to write off Greece's debts

Politics, rules behind German resistance to writing off Greek debt Associated Press

By David Mchugh and Geir Moulson, Associated Press |
Associated Press – Thu, Jul 16, 2015 2:01 AM AEST



Why Germany refuses to write off Greece's debts Politics, rules behind German resistance to writing off Greek debt Associated Press By David Mchugh and Geir Moulson, Associated Press | Associated Press – Thu, Jul 16, 2015 2:01 AM AEST

FRANKFURT, Germany (AP) -- The International Monetary Fund says Greece's debts are too big to pay and need to be partly forgiven.

Germany says that's out of the question.

German officials, led by Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble, say that as part of a new rescue package for Greece they will consider giving it more time to pay its debts and perhaps lower interest rates. But no outright cut on what it owes.

If pressed, Germany officials concede the IMF may be right in saying that Greece's debt pile is too big to pay, no matter how many years it gets to pay it. Still, they exclude any write-offs.

The German position — joined by several other countries, including Finland and the Netherlands — seems to leave Greece in a tight spot: The debt might not be payable, but must not be reduced.

Here are five reasons why Germany may be taking that stance.

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1. It's taxpayers' money, and these are elected officials in a country where bailing out Greeks for previous profligacy is not popular. It particularly unloved among members of Merkel's and Schaeuble's conservative party.

Countries that have been through economic crises, like Spain, are also taking a tough position on Greece since they did the hard work of reducing their own debts through painful spending cuts.

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2. The European Union treaty forbids countries from taking on each other's debts and, says Schaeuble, rules are rules. That was a basic provision installed way back before the euro was founded, in part to ensure that the shared currency wouldn't mean Germany paying for other people's mistakes.

Of course, the European Union found a way to get around it to do the earlier bailouts, by citing an emergency relief clause that's also in the treaty.

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3. Give one country a break, and others may wonder why they can't have one, too. Ireland, Portugal, Cyprus and Spain all got bailouts and imposed tough cuts along with pro-business reforms; those countries are beginning to see recoveries.

Handing the left-wing Syriza government in Greece its chief demand, debt forgiveness, would encourage other anti-austerity political movements, such as Podemos in Spain. Spain, Portugal and Ireland all have general elections in the next nine months.

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4. Future eurozone governments may look at the debt writedown and feel less compelled to keep debt under control, an issue economists call "moral hazard." In other words, bailouts encourage risk-taking.

German Finance Ministry spokesman Martin Jaeger says that the European approach of making countries' debt sustainable by getting budgets in shape has worked well elsewhere. He said Germany still believes that approach can work in Greece.

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5. Why promise Greece a haircut before it does more to help itself? Since its first bailout in 2010, Greece has been promising reforms of its wage-bargaining system, expensive pensions, shaky tax collection, clogged legal system and sweetheart deals for trades with restricted entry. Somehow it all never quite gets done.

Negotiations for a third Greek bailout package of about 85 billion euros will include conditions such as spending restraint, pension reform and pro-business changes that would ultimately improve Greece's ability to pay.

They also include a promise to ease the terms of Greece's debt.

The IMF's warning Tuesday that Greece needs debt relief going "far beyond what Europe has been willing to consider so far."

It isn't proposing to write off its own loans to Greece, saying it represents many poorer countries around the world. But argues Europe should be able to.

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