How painful is the Greek tragedy for the Germans?

Handshake between Angel Gurría, Secretary General of the Organisation for Economic Cooperation and Development (OECD) on the left, and Wolfgang Schäuble, German Federal Minister for Finance seated, in the presence of Olli Rehn, Member of the EC in charge of Economic and Monetary Affairs, on the right, (EC Audiovisual Services).

When the International Monetary Fund completed some weeks ago its fourth review under the Extended Fund Facility Arrangement for Greece, and approved for this country a new disbursement of €1.72 billion, it performed also a Debt Sustainability Analysis, which is a prerequisite for any IMF loan. According to this DSA, Greece would face a funding gap of around 4% of GDP after 2013. Yet since the funding needs of the country were covered for the next twelve months and the DSA results are dependant on developments during that time, it was not certain that the Greek debt was not sustainable. That’s why the IMF approved the disbursement of the €1.72bn. Not without pain though. The Greek aid split deeply the Brazilian government.

It must be noted that the IMF cannot support a country if its debt is not sustainable. The IMF’s DSA however triggered a discussion between Brussels, Berlin and Washington where the IMF is based, over who is going to cover the financial gap of Greece when it will materialise and how much will it be. Conveniently this issue was termed as the ‘third aid package to Greece’.

Election time

Unfortunately the leaders of the major opposition SPD party (socialists) in Germany chose to make the extra capital needs of Greece, a central, if not the central, issue in their electoral campaign in view of the 22 September elections. Their target was to expose the Berlin government of the ruling coalition of CDU (Christian Democrats) and the Free Democratic Party (liberals) as hiding the truth from voters. Understandably if Greece was to receive a new third aid package, the largest contributor in it would be the German taxpayer.

The discussion was further animated when more than one IMF representative noted that in the Eurogroup meeting of November 2012, Greece’s Eurozone partners had undertaken the obligation to materially help this country make its debt sustainable. This means the country’s creditors have to accept a trimming of their loans, in one way or another. It must be noted at this point that the bulk of the Greek debt is now held by Eurozone governments and central banks and of course the ECB. In principle then it would be a simple procedure for those debtors to cut down their claims. The problem is that everywhere in Eurozone and more so in Germany such a measure would attract a hell lot of opposition from political parties and taxpayers.

The IMF insists

The IMF though didn’t let the issue sleep. Poul Thomsen, the Deputy Director of the IMF’s European Department, in charge of the Fund’s programs for Greece and Portugal, in an interview delivered at the end of July gave concrete evidence of how much a debt relief to Greece should be. He said “Now, on the other issue of debt relief, yes there is a mentioning of 4 percent, (of GDP) but that is just a number that comes from the debt service analysis that we have right now. As you know, the debt relief agreed by the Europeans, the commitment to provide any debt relief, if necessary, to bring the debt-to-GDP to 124 percent by 2020, will be based on a DSA analysis in two years, right? So it’s too early to say if any debt relief will be needed and how much. Under our current projections, that would be 4 percent. But the projections are revised every quarter as we go forward. So we cannot go out and say that the IMF says that x-percent will necessarily be needed. That will depend on the DSA at that time”.

Of course Thomsen didn’t want to be absolutely precise on the new package that Greece would need after twelve months, but he made it completely clear that currently those needs are estimated to be around 4% of the country’s GDP. Later on more exact estimates of this eventual third Greek package figured it at around €11bn.

The Greek tragedy costs

Meanwhile in Germany developments on this issue during the past few weeks have been prime news, heightening the confrontation between Angela Merkel’s government and the socialist-greens opposition. The socialists want to expose the Chancellor as hiding the truth, thus unduly protecting her electoral prospects, which by the way are bright in all opinion polls.

Given however that it is almost certain the CDU-FDP government coalition will win the 22 September election and will find the Greek drama on its agenda within months, the Federal Minister of Finance, Wolfgang Schaeuble, undertook the difficult task to ‘serve’ to German voters/taxpayers the prospect that Greece may soon need more of their money. He started this task last week by accepting that Athens may need more help after one year. Yesterday he became more accurate. In an interview to the daily Rheinische Post he said that the latest IMF’s estimate of the future financial needs of Greece at €11bn, “do not seem to be completely unrealistic”.

In short the German public opinion is now informed on the extra Greek cost. A large part of it will of course be financed by the German taxpayers, who are now been psychologically treated to be ready for that.