A second haircut

German Finance Minister Wolfgang Schäuble has in principle taken the sting out of the expected troika report on Greece's progress towards budget consolidation, by saying he has categorically ruled out any state bankruptcy in the southern European nation.

Now that very report, which is yet to be published, is making quite a splash. Experts from the European Union, the European Central Bank (ECB) and the International Monetary Fund (IMF) are calling for a second haircut for Greece, media reports claim.

For German finance expert Max Otte, such a debt haircut is nothing but an orderly insolvency and an acknowledgement of bankruptcy. "It's two words meaning the same thing," Otte said, "but there's no denying that Greece is bankrupt."

In March, banks and insurers already had to forgo receivables to the tune of 100 billion euros ($129 billion). But that was to little avail, as the Greek economy has since continued to drastically contract. Total debt levels are again rising towards 160 percent of gross domestic product: the level in place before the first haircut.

Genuine haircut required

According to Otte, a genuine debt-cancellation initiative is finally needed, meaning one that would make big assets part of the equation in a sensible way. "To a large extent, Greek bonds are in the hands of Greek banks," he said. "This means that a genuine haircut would be quite a burden on those banks."

Otte said many of those banks would have to file for insolvency. As a result, many of the super-rich Greeks who have profited from their country's current misery would at once be a good deal poorer.

Schäuble, however, has balked at the idea of another haircut, which would also target public creditors this time around. As the IMF and the ECB will not be involved out of principle, only eurozone nation states would be left to foot the bill.

So far, Germany has lent Greece some 80 billion euros by granting emergency credit lines or buying up sovereign debt through the ECB. A 50 percent debt cancellation, then, would leave Germany with a loss of 40 billion euros. It would be the first time that German taxpayers would actually lose money in an attempt to rescue Greece from bankruptcy.

Awkward truth

"Up until now, Germans have been told that their country was only assuming liability for a certain sum without taxpayers actually facing any costs," said Johann Eekhoff, the director of the Cologne-based Institute for Economic Policy. A year before Germany's general election, the government doesn't really want to tell the population the whole truth as to the real costs of the operation involved. This is why the finance minister is desperately looking for arguments that would speak against public creditors' being let in on the haircut.

Schäuble said for budgetary considerations, it would not be permissible to throw more money after a debtor that is not in a position to live up to its obligations. "But that's happened all along," said Otte. "We have already provided fresh money on many occasions."

Whether Greece gets a second haircut or not, fresh money will flow to the country when the troika report is published. "Transfers to Greece will ensure the country's solvency so that open receivables can be serviced," said Eekhoff.

As a matter of fact, over 70 percent of all transfers are swallowed up by debt-servicing. Small wonder, then, that Greeks don't feel like they're being rescued. On the contrary: they'll have to brace for even more social cuts and less sovereignty. The new troika report is expected to include a few proposals to this end, with a second haircut meant to be a sign of accommodation.

For Otte, the country's exit from the eurozone would be a better option. "Greece has saved itself to death," he said. "There is unrest in the streets, and in Thessaloniki some people have sent their children to orphanages because they don't have the money to feed them properly."

Otte says this brutal policy has to stop. He believes that, outside of the eurozone, Greece can handle the unavoidable depreciation processes in a much gentler way.