Greece is effectively bankrupt – better to declare and arrange a deal

By Bruno Waterfield, Brussels

8:16PM GMT 18 Feb 2012

The German finance ministry is actively pushing for Greece to declare
itself bankrupt and to agree a “haircut” on the bulk of its debts held
by banks, a move that would be classed as a default by financial

Eurozone finance ministers meet on Monday to approve the next tranche
of loans from the EU and the International Monetary Fund, designed to
stave off national bankruptcy while the new Greek government puts the
country’s finances in order.

But the severe austerity measures being demanded have caused such fury
in Greece, and the cuts required are so deep, that Wolfgang Schäuble,
the German finance minister, does not believe that any government
would be able to implement them.

His pessimism has been tipped into despair with a secret European
Commission, Central and IMF report that even if Greece made good on
its promises, it would not be enough to reach the target of bringing
total debt to 120 per cent of GDP by 2020.

“He just thinks the Greeks cannot do what needs to be done. And even
if by some miracle they did what has been promised, he – and a growing
group – are convinced it will not pull Greece out the hole,” said a
eurozone official.

“The idea instead is that the Greek government should officially
declare itself bankrupt and begin negotiating an even bigger cut with
its creditors. For Schäuble, it is more a question of when, not if.”

The German finance minister’s comments are certain to plunge the
authorities in Athens into even deeper gloom. On Saturday they tried
to sound optimistic, with a cabinet meeting to thrash out the final
details of an austerity package.

The cuts, including a reduction in the minimum wage, mass redundancies
within the public sector, and a slashing of the health and defence
budgets, sparked rage on the streets of Athens last week, with
buildings set on fire amid angry protests.

But the country’s politicians are resolutely trying to sound upbeat.
“The Greek people have done everything they can and we are determined
to make good on our commitments,” said Christos Papoutsis, public
order minister.

The French prime minister, Francois Fillon, lent his support to the
embattled Greeks when he cautioned last week that Europe should not
“play with the default of Greece” and must now play its part.

“The Greeks have promised very important reforms,” he told RTL radio.
“The Europeans now have to keep their commitments.”

With Greek morale at rock bottom, the national mood darkened yet
further after armed thieves looted a museum on Friday in Olympia,
birthplace of the Olympic Games, and stole bronze and pottery
artefacts – just weeks after the country’s National Gallery was

One Greek newspaper suggested the state could no longer properly look
after the nation’s immense cultural heritage. “The Greek state has
gone bankrupt, let’s face it,” the conservative daily Kathimerini said
in an editorial.

“If the state cannot guard the country’s great cultural heritage for
financial or other reasons it must find other ways to do it.”

Mr Schäuble’s pessimism will not be welcomed in Athens. The hugely
influential German politician’s doubts have been growing for several
weeks, and prompted angry exchanges when Greece accused Germany of
trying to drive it out of the euro.

His scepticism is not yet fully shared by Angela Merkel, who is said
still to be determined to prevent Greece’s financial collapse. “She
thinks Greece going bust could cause a shock wave that buries other
countries – with Spain and Italy among them. It could break apart the
entire monetary union,” said an official.

But it has support from Austria and Finland – holding the prospect
that a eurozone meeting tomorrow will fail to agree the next set of
EU-IMF payments for Greece.

Greece must service €14.5 billion of debt on March 20 and, before
EU-IMF cash can flow into its accounts, persuade private creditors of
the country, mainly banks, insurance companies and funds, to give up
on 70 per cent of their claims.

“The private sector involvement takes at least four weeks to issue the
prospectus and to get subscribers, and without a deal on Monday then
time will run out in March,” said an EU diplomat.

Rumours are already circulating in Wall Street that banks are
preparing for a “credit event” – a technical term used by credit
agencies to mean a default – in the days immediately following March
20, as Greece looks likely to be unable to meet its debts.

The sense that an endgame is approaching has been fuelled by the
secret “troika” report, by EU, IMF and ECB officials on Greek debt

It found that even if Greece implemented all the austerity measures
expected of it, and if it achieves highly optimistic economic growth
targets, it will still fall short of what is needed, with debt likely
to total 129 per cent of GDP in 2020.

But the European Central Bank and the Eucopean Commission are, for
now, lining up with Mrs Merkel to push for the rescue attempt to
continue, fearful that the financial tsunami that would be unleashed
if it failed would swamp the eurozone.

Mr Schäuble maintains that since Greece is already regarded by the
financial world as bankrupt, a formal bankruptcy would have no
negative consequences for other euro members.