The Germans have some good points to make about Greece. Perhaps their best one is to remind people just how much debt relief Greece has already enjoyed.
In March 2012 97% of all the bonds held by the private sector representing money lent to Greece were reduced in value by 53.5%. This meant a Euro 107 billion gift to Greece and loss to the bondholders.
At the same time the Greek Loan Facility from the EU accepted a 1% or 100 basis points reduction in the interest receivable on its loans. The EFSF guarantee commitment fees were waived and the maturity date of all GLF and EFSF loans to Greece was extended by 15 years. Interest on loans from the EFSF (which became the main lender to Greece) was deferred for ten years.
These very generous terms were not made available to other emergency borrowers from the EU. The ESM official website tells us these changes cut Greece’s debt burden by a handy 49% of 2013 GDP.
The problem is, the Greek economy has not recovered and Greece has not found a way to prosperity, despite this debt retirement and despite substantial new loans being offered. If Germany were simply a profit oriented bank manager she would conclude that this had so far proved to be very bad business, and would also conclude that lending more was unlikely to be more successful than past loans.
Were the EFSF and the IMF to contemplate writing more debt off or extending it further and making its terms yet more lenient,they would also be wise to change the policy they are recommending attached to any future loans. Why should the next lot be any better at triggering prosperity than all the debt so far advanced?
If the rest of the Euro area want to keep Greece in and avoid perpetual crisis, they need to put Greece on grant aid. If they want a real Greek economic revival, they have to allow Greece out of the Euro, and have a proper IMF recovery package which usually includes a devaluation and an accommodating money policy to permit growth without too much inflation. The Euro is just giving Greece permanent deflation. In such a circumstance more public sector cuts depress demand further, as the private sector cannot take up the slack.