As the troika of international creditors to Greece met on Monday to finalize the next tranche of aid for Athens, one economist has warned that the euro zone is likely to resolve Greece's immediate funding crisis with a "sticking plaster" but fail to resolve the main issue: the unsustainable debt burden.
Debt restructuring is "is likely to be a step too far for core politicians," Ben May from Capital Economics said in a report on Monday, adding that the proposals so far to lower interest rates or tweak growth targets for Greece were unlikely to help the country in the long run.
"The key point is that the deal [on further financial aid] will only result in debt falling in the medium term if the economic assumptions on which it is underpinned prove accurate," May stated.
Euro zone finance ministers, the International Monetary Fund and the European Central Bank (ECB) are meeting in Brussels on Monday to finalize aid worth 31.2 billion euros ($40 billion) for Greece.
Though European officials have pondered how to lighten the country's debt load of 300 billion euros, with lower interest rates on loans or a debt buy back scheme, economists are adding to calls from the IMF that more radical action — in the form of debt writedowns — is needed to put Greece on the road to recovery.
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Greece's debt burden is expected to peak at 190 percent of GDP next year. But without further debt concessions, the country is unlikely to meet the target of a 120 percent debt to GDP ratio by 2020.
According to Reuters, policymakers are looking at a number of options, including a reduction of the interest rates on Greek debt from 150 basis points above financing costs, defering interest payments on loans to the European Financial Stability Facility, a possible debt buyback and for the ECB to forego profits on its Greek bond portfolio.
But the elephant in the room remains a writedown on Greek debt.
"Even if the debt buyback enables the IMF and EU leaders to come to an agreement, leading to a Greek resolution in the near term, in the medium to long term Greek debt is not sustainable on realistic macroeconomic assumptions without notable outright haircuts on official EU loans to Greece," Cagdas Aksu, an economist at Barclays, said on Monday.
That's one reason a report in Germany's "Welt am Sonntag" over the weekend got so much attention. The newspaper said policymakers were in fact looking at a debt waiver in 2015, which would cut Greece's debt burden to 70 percent of GDP by 2020, instead of the current target of 120 percent.
A of such a size would mean donor countries would have to forego half of their claims, the newspaper said, adding that the German government wanted to avoid such a writedown because it would cost German taxpayers billions of dollars.
Germany in Denial Over Debt
While dealing with its own deteriorating economic outlook, Germany, the EU's biggest economy and the euro zone's paymaster, has been resistant to calls from the IMF and others to accept losses on its Greek debt holdings.
German Finance Minister Wolfgang Schaeuble sent out mixed messages on Greece's indebted future last week. Sources told Reuters that during a small meeting of euro zone policy makers Schaeuble said that Germany would be prepared to consider some kind of "conditional debt relief" for Athens if it stuck to reforms.
Within 24 hours, however, he had backtracked and maintained the official German government line that a writedown of Greek debt by euro zone governments would be wrong and illegal.
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Members of Chancellor Angela Merkel's political party fear that giving Greece an inch on debt relief would lead to other struggling euro zone countries following suit.
According to Capital Economics, a pointblank refusal by Germany to allow Greece to restructure its debts would make a "Grexit" - a Greek exit from the euro - more likely.
"We see no reason to alter our view that Greece will leave the euro-zone by the middle of 2013," Ben May of Capital Economics wrote.
May's warning follows growing criticism from within Germany that the country is in "self-deception" mode over Greece's debt levels.
German newspaper Der Spiegel said that "In the midst of all this [discussions over a next tranche of aid], it is clear that Greece cannot support its debt burden, most recently more than €300 billion, in the long term," the newspaper said.
Euro Zone Undermining Itself
Nicholas Spiro, managing director of Spiro Sovereign Strategy, told CNBC that reaching any important decision on the euro zone was akin to "herding cats", that is, attempting to find cohesion among diverging and rather chaotic elements.
"Disagreements between Athens' creditors on a range of issues — some fairly trivial, others much more substantive — are further undermining the credibility of Greece's bail-out programme," Spiro said on Monday. "The main problem is no longer the Greek government, but the Troika itself."
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Spiro added that Athens was effectively being held hostage to "political, electoral and reputational considerations among Greece's creditors" with bailout fatigue among creditor countries and "severe misgivings on the part of the IMF about the sustainability of Greece's public debt burden" throwing the repeated failures of crisis management in the euro zone into sharper relief.
Spiro agreed that debt restructuring called for by the IMF was the only way to alow Greece to recover growth: "It's clear as the light of day that in order to put Greece's public finances on a more stable footing and secure the country's membership of the eurozone, there needs to be large-scale debt relief involving the official sector," he said.