Former German finance minister Peer Steinbruck (Social Democrat) comments on Greece:
Steinbrück, when asked the first time if a (partial) debt cancellation for Greek would not be on the agenda, answered: “No, they already hat two cuts“. He also complains that a cut in Greek debt would hit European tax payers.
The case for not accepting a Greek hair cut rests on two pillars:
- The ruling coalition government of Germany would lose votes;
- European tax payers lose money
The second reason is something which can be circumvented if the ECB buys sovereign bonds and then accepts the losses on those bonds by letting equity fall into negative territory. Whereas private banks with negative equity are closed down, this is not the case for central banks. They can always create new deposits for participating banks because they are running the accounting system. Marking up the deposits that a bank has at a central bank is not dependent on the equity position of the ECB.
The Federal Reserve Bank, for instance, has bought up lots of treasury bonds. The effect is that the treasury pays interest to the Fed, which books this as a profit. Central bank profits usually are returned to the Treasury, hence the Fed will transfer the money back to the Treasury. Sovereign debt problem solved, interest rates under control. This is modern sovereign money. The ECB, by the way, can do the same and does so with quantitative easing (although for different reasons). This does not create inflation, because money is moved from the governments account to the central bank and back (it’s not the same money, by the way). No goods are purchased, no services bought.
So, the only reason why the German government does not accept another debt cut for the Greek government is political.
In 2013 that 77% of the bail-out money went to the financial sector and not the general population. The Greek crisis is not about the Greeks living by spending our money. It is about the European banks lending money to the Greek government, which was not able to repay in 2009. Instead of finding a solution right then and there, politicians decided to kick the can down the road, while the Greek government bonds had two hair cuts and were moved to public institutions where now 90% of them seem to be. So, European politicians created the huge potential costs for taxpayers. Potential costs that did not exist in 2009.
Last but not least, remember that austerity was imposed on Greece through the troika, which helped to create a fall of GDP by some 25%. Of course the debt-to-GDP also went up because of the loss of output. So, to a significant extent austerity policies imposed by the troika are indeed the reason why now with the diminished output Greeks cannot repay their foreign debts.
