Things are getting heated between politicians and central bankers in Europe regarding the debt crisis of Greece. Some euro-zone states, including Germany, have called for a restructure of Greek debt. One of the top officials with the European Central Bank referred to this idea as a “horror scenario.”
Things seem to have entered a new phase of bad.
At the heart of the issue is how much the wealthier euro-zone countries will pay for the bloc to remain intact. The central bank and several euro-zone governments cannot agree whether more aid should be provided to Greece or if the country should be forced into defaulting on its obligations.
The European Central Bank and Moody’s fear that even the smallest amount of debt restructuring could negatively impact weak countries in the euro-zone like Ireland.
On the other side of the coin, Germany and some other strong economies in the bloc are not thrilled about the political ramifications of providing a future bailout. The fear is this would lead to a fiscal union, with strong countries being forced to pay for weak ones.
There is general agreement that the €110 billion in bailouts already provided is not enough to last through 2010. However, there is little consensus about how to plug this gap.
Finance ministers in France, Germany, and other key countries are considering reprofiling Greek debt. This would involve getting private creditors in Greece to accept repayment later than initially planned. Greece could use this money to shorten the fiscal gap in 2012 and 2013.
Optimistically, this would make a second bailout unnecessary.
One huge issue regarding restructuring is that Greek debt could not serve as collateral for European Central Bank loans. Greek banks view these loans as a lifeline, borrowing €88 billion just during the month of March.
Suspension of these would force the banking system in Greece to its knees.
