A Case of Delayed Filing for Bankruptcy

The Eurogroup has agreed to release a fifth and final loan tranche of 15 billion euros to Greece. In addition, the Greek government has been granted an extension for the repayment of its loans as well as interest rate cuts so as to ensure the country’s debt sustainability in the coming years. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW), offers his view on the matter.

“Greece has accomplished impressive results in adjusting to the given requirements. It is therefore appropriate for the Eurogroup to reward this achievement with comprehensive debt relief measures, thus giving Greece more room to manoeuvre. What is entirely inappropriate is the lack of transparency of this new deal.

By extending the maturities of comprehensive loans until 2032 and granting interest rate cuts, the Eurogroup has deferred the inevitable debt cut to the distant future. This is basically a case of delayed filing for bankruptcy. The view that Germany and other euro states benefit from granting loans to Greece is absurd from an economic perspective. From a commercial point of view, Germany would have to write off impaired loans worth several tens of billions of euros with immediate effect. Compared to these write-offs, the low interest gains from previous loans are rather negligible.

The fact that the International Monetary Fund (IMF) does not participate in the new loan programme sends a clear message: IMF rules prohibit giving out loans to insolvent states without a previous debt cut. The case of Greece gives us a glimpse of the time when the Eurozone has set up its own European Monetary Fund (EMF) without the IMF’s involvement. It is likely that the EMF will be far more lenient in dealing with crisis-stricken countries. In view of the political development in Italy and the imminent conflict with Rome regarding the compliance with European deficit limits, this message comes at exactly the wrong time.”

For further information please contact

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail friedrich.heinemann@zew.de