Despite the German government’s repeated denials of the possibility of a new Greek debt haircut, the head of the German Institute for Financial Research (DIW) Marcel Fratzscher considers a haircut inevitable.
According to Deutsche Welle, Mr. Fratzscher considers the Greek government unable to implement many of the necessary reforms, such as privatizations and the collection of taxes. The DIW head explained that the government will miss some of its goals.
Contrary to the first haircut that happened in March 2012, the lack of private creditors could have an impact on the public sector. Mr. Fratzscher added that it is difficult to estimate the financial burden a new haircut would incur on the German taxpayer. Earlier in the week Mr. Fratzscher revealed that Germany would have to pay billions of euros in the next few years.
When asked about the possibility of the ECB participating in a second “haircut”, the German economist explained that this would complicate matters, but a solution could be to transfer titles to the ESM.
With German elections looming in September, any mention of a haircut to the Greek debt is risky. The main fear is that if Germany concedes to Greek demands, other Eurozone countries affected by the crisis might react and pose demands. As such, Mr. Fratzscher suggests the extension of payment deadlines and reduction of interest rates are a more preferable option.
