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Merkel - must not "dangle" idea of new Greek debt writedown
December 3, 2012 / 6:35 PM / 5 years ago

Merkel - must not "dangle" idea of new Greek debt writedown

BERLIN, Dec 3 (Reuters) - German Chancellor Angela Merkel said on Monday it was important not to promise a further writedown on Greece’s debt at the moment as this would reduce the country’s incentive to reform, a day after indicating a haircut was possible in the future.

Last Tuesday Euro zone finance ministers and the IMF approved a package of measures including interest rate reductions and an extension of repayment periods aimed at cutting Greece’s public debt to 124 percent of national output by 2020.

Germany insists a writedown of Greek debt held by euro zone governments would be illegal, though Finance Minister Wolfgang Schaeuble has also recently signalled that some kind of debt ‘haircut’ for official lenders might be needed eventually.

“I think it is very important that we don’t dangle the possibility of a haircut on debt right now, as all efforts would then dwindle straight away,” Merkel told public broadcaster ARD.

“It is important today that Greece continues on its reform path, even if that is very, very arduous.”

The prospect of the German government taking a ‘haircut’ on the Greek debt it holds is politically risky for Merkel ahead of next year’s federal elections when she will seek a third term.

Germans would see such a writedown as a move towards a ‘transfer union’ whereby richer northern European nations bankroll southern ones they consider undisciplined.

Merkel said in an interview published on Sunday that Greece’s creditors may look at writing down more of its debt but not before the current bailout programme has run its course.

“The time must come when Greece can once again really live on its own income, and then, we’ve said we must check the situation again,” Merkel said in Monday’s interview.

Merkel said the euro zone crisis had built up over many years and could not be easily solved by a haircut or euro bonds.

“It will be a very long process, there are mistakes that lie in the very introduction of the euro,” the chancellor said. “As a result we will need a long path to redress these initial mistakes.”

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