Another Greek haircut?

It's the European Commission head's first visit to crisis-ridden Greece in three years - and it's not "routine," no matter how much Jose Manuel Barroso's spokesman in Brussels seeks to sell it as such.

On Thursday, Barroso is to meet the Greek prime minister, Antonis Samaras, to go through the few remaining options that might save the de-facto bankrupt country.

It's probably no coincidence that Barroso's visit coincides with the latest round of investigations by the so-called "Troika." That's the EU monitoring body for the Greek financial reforms, consisting of the International Monetary Fund (IMF), the European Central Bank and the EU Commission. The Troika will also conduct its first talks with the new Greek government, formed just a month ago, on Thursday.

EU insiders paint a gloomy picture

In preparation for Barroso's visit, EU officials invited reporters to Brussels for background talks, and brought out the heavy artillery: Government officials, who didn't want their names revealed, told the Reuters news agency that the Greek debt has reached a practically unmanageable level - and that Greece had done little to nothing about it over the past four months.

Greek Finance Minister Ioannis Stournaras is trying to cobble together 11 billion euros ($13 billion) in cuts, which were supposed to be delivered by June. But two elections and a change of government have brought reforms to a standstill in recent months.

"Greece has veered far off its course," said one of the EU officials. He said that even the second aid package of 130 billion euros from the EU and IMF, combined with debt relief from private creditors in March, was no longer enough to tackle the existing debts in time. Greece has been charged with reducing national debt, currently at 160 percent of gross domestic product (GDP), to 120 percent of GDP by 2020 and ultimately back to the prescribed EU upper limit of 60 percent of GDP.

State creditors: next to give up money?

Should this not be accomplished, the debt burden would no longer be considered "sustainable." Then, the governing statutes of the IMF - which has contributed one third of the emergency Greek loans to date - would forbid the body from transferring further funds to Athens. A third aid package would be necessary to keep Greece financially afloat. But according to EU insiders, six bloc members - including Germany - categorically oppose this.

The Greek government would like to extend the existing programs by another two years. This would cost creditors up to 50 billion euros - and is therefore at least publicly said to be out of the question.

A last option would be a second debt relief, or "haircut," for Greece. In March, the country's private sector creditors - that is: banks, insurance companies and investment funds - waived a large part of their claims.

In a second such case, the burden would likely fall on public sector creditors, who have provided 200 billion euros of Greek debt. The main players here would include the European Central Bank, the IMF and individual European states. Two years ago, at the beginning of the rescue mission, they all loaned money to Greece on a bilateral basis. Should they agree to a haircut, it would ultimately mean that European taxpayers would be settling the Greek debt - not an easy sell given the current political and economic climate. Economically, a restructuring of the Greek debt would indeed make sense, the EU officials told Reuters, but it's the political will that's lacking.

European Central Bank: debt relief as a last resort

The idea of a second round of debt relief for Greece isn't new. At the beginning of July, former Deutsche Bank CEO Josef Ackermann said: "The country is likely to require a second cut of its debts in order to reach the 60 percent of GDP goalpost." One of the financial lawyers that helped administer the private sector haircut is the New York-based expert for debt conversion, Lee Buchwald. In July, he told the weekly newspaper Die Zeit that "a second debt relief wouldn't surprise me."

Since the last EU summit at the end of June, the European Central Bank has also voiced its concern. German board member Jörg Asmussen told the Greek newspaper Kathimerini that the sustainability of the current debt load was again teetering on a knife's edge. Should that indeed be the case, Asmussen said, then every possible measure would have to be taken to regain sustainability. In other words: another haircut.

Touring Europe for support

In the second week of August, Greek Prime Minister Samaras is set to embark on a tour of the various EU capitals to drum up support for loosening Greece's fiscal strait jacket. According to Greek media reports, he also plans to meet with the head of the IMF, Christine Lagarde. Even this January, Lagarde had already said it might be necessary for public creditors to join the debt relief for Greece; back then, she was mainly referring to the European Central Bank, which holds around 50 billion euros in Greek state loans.

Later, in May this year, Lagarde openly criticized Greece, saying that the country's ethical standards when it came to paying taxes left a lot to be desired. Her more negative comments had prompted speculation that the IMF was losing faith in the Greek rescue effort, something Lagarde had not officially denied until earlier this week.

Author: Bernd Riegert / ag
Editor: Mark Hallam