by Matthew Kanitschnig*
The issue comes to a head as Athens faces an evaluation of its reforms.Germany is pushing for the gradual introduction of debt relief for Greece and is resisting pressure to grant Athens an array of restructuring measures at once, according to officials close to the deliberations.
During negotiations on Greece’s third bailout over the summer, Germany refused to consider outright debt forgiveness, a so-called haircut, but signaled a willingness to accept limited debt relief through a range of steps, including extending the maturities on the loans and delaying interest payments.
Economists are divided over how important debt relief is for the Greek economy, but the issue carries great symbolic importance, both in Germany and in Greece, where Prime Minister Alexis Tsipras has made it a top political priority. A relaxation of the debt burden could make it easier for Tsipras to sell some of the tough restructuring measures that lie in store for Greeks, including new taxes, labor market rules and changes to pensions.
The matter will come to a head in the coming weeks when Greece faces an evaluation of its reform efforts. The review, expected in November, will determine whether Athens has met the targets necessary for the release of aid. But its creditors have also made debt relief contingent on a successful outcome.
The hardening of Berlin’s position on the issue raises new questions about whether the International Monetary Fund, which has refused to join the latest Greek bailout until Greece’s debt load is more sustainable, will participate in the rescue. The IMF advocates sweeping debt relief to erase questions about the stability of Greek finances and encourage foreign investment.
The IMF has argued that Greece’s debt payments would need to be pushed out by several decades in order to achieve those goals.
German Chancellor Angela Merkel wants the IMF on board, but is under pressure within her own conservative party to take a harder line on the debt question. Finance Minister Wolfgang Schäuble and other conservatives have argued that creditors have already granted Greece deep concessions and that the scope for more relief is limited.
Indeed, the debt Greece amassed from its two previous bailouts, about €184 billion, carried an average interest rate of 2.7 percent and an average maturity of nearly 16 years in 2014. The annual interest burden is about 20 percent less than either Italy or Spain pay, according to a recent study published by the Kiel-based Institute for the World Economy.
Overall, the concessions granted to Greece so far have effectively reduced its debt burden from the first two rescue programs by more than half, the study concluded.
Agreeing to even more relief, at a time when Germany is taking on the additional burden of accepting up to one million refugees this year, could deepen the backlash over the bailouts.
The biggest challenge for Merkel is the Bundestag, the German parliament. It will have to approve any changes to the terms of Greece’s credit agreements.
On the vote for the third rescue in August, which totaled €86 billion, more than a quarter of her deputies refused to support the measure.
*Matthew Karnitschnig is the Germany Bureau Chief for The Wall Street Journal