The more Merkel says a 'haircut' won't happen, the more likely it looks that Greece will leave
On the one hand, she was insistent that there should be no "haircut" on Greek debt. But on the other, she admitted "this question will be discussed" at some date in the future, once the EU has examined the success of Greece's reforms.
Her answers - there will be no haircut, except for when we might discuss a haircut in the future - show you a lot about the impossible situation faced by both Greece and Germany. These are the two key issues:
- When will Germany realise that it is not possible for the puny Greek economy to pay back its debts?
- When will the Greeks realise that staying inside a monetary union that keeps them crippled with debts they cannot pay isn't working?
Here's what Merkel said yesterday, from the BBC translation:
But Mrs Merkel said again on Sunday that "a classic haircut of 30, 40% of debt cannot happen in a currency union".
"Greece has already been given relief. We had a voluntary haircut among the private creditors and we then extended maturities once and reduced interest rates," she said in an interview with ARD TV to be broadcast later on Sunday. "And we can now talk about such possibilities again... once the first successful review of the programme to be negotiated has been completed, then exactly this question will be discussed - not now, but then," she said.
To recap, Greece took an €86 billion euro bailout from the EU, which it must now pay back. But the IMF - which is owed about €32 billion ($35 billion / $22 billion) - believes the debt is unsustainable, given that it represents about 200% of Greece's GDP.
It looks increasingly clear that the only way out of the Greek crisis is to go through it - by letting Greece leave the euro, re-adopt the drachma, and then get the benefit of devaluing its currency. It wouldn't be pretty, but it would give Greece the one economic lever it currently doesn't have, the ability to make its goods and services attractively cheap.
But the EU's position on this is, again, beset by contradictions. On the one hand, you've got European Commission President Jean Claude Juncker saying, "We should make sure that everyone understands that the economic and monetary union is irreversible". At the same time, the BBC reports, Juncker had "a Grexit scenario, prepared in detail" earlier this month.
So the EU is both insisting Greece can never leave while simultaneously preparing a plan for it to leave.
The current bailout will probably let Greece pay / refinance the 3.5 billion euro bond it owes to the ECB today. But that doesn't solve the long term crisis of Greek debt. One solution, pushed by Germany, is to execute a haircut on Greek bank deposits, according to the Financial Times:
Under the terms of a potential third, €86bn EU bailout agreed by the prime minister last Monday, the country must adopt the bloc's Bank Recovery and Resolution Directive. This strengthens Greek powers to write down senior bondholders and big depositors in a "bail-in" to shore up lenders' balance sheets. Up to €25bn would also be available to further recapitalise the banks.
During crunch talks last weekend in Brussels when the deal was agreed, German officials pushed for any deposits over €100,000 to also be used in the recapitalisation.
The problem with that idea is that the majority of deposits over €100,000 belong to Greek businesses, according to a Greek banking source who spoke to the FT:
"If you go after that money, you would cause a massive wave of corporate defaults. It would be completely foolish. It would be devastating," he said. "It would cause irreparable damage to the economy."
It would also turn Greek businesses against Merkel. While the Greek left - and the Syriza government - have been anti-Merkel all along, Greece's pro-business conservatives have stayed loyal to the EU. But that loyalty would end if the Germans insist that private bank deposits be used to bail out Greek government debt.
At which point, there would be no one left in Greece who sees any advantage in staying inside the eurozone.