Schäuble's successor

Crunch time for Germany’s new finance minister and troubled Greek debt question

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Greece two. Source: Reuters

Germany’s newly minted finance minister, Olaf Scholz, has inherited the thorny issue of Greek debt relief just as it’s time to stop kicking that can down the road. Longtime finance minister Wolfgang Schäuble had played for time, insisting for years that Greece make a firmer commitment to reform before Germany would consider debt relief.

But now the current bailout program is running out, and the euro zone needs to make concrete decisions on debt relief to get buy-in from the International Monetary Fund on aid going forward. The international lending agency says that Greece’s debt is unsustainable and is calling for some debt relief before joining any further bailouts. Mr. Scholz will be grappling with this issue as he attends the IMF meeting in Washington this week for the first time.

The Washington Group – representatives from the IMF, the European Central Bank, the European Stability Mechanism and the finance ministers of the four biggest euro-zone members – will meet informally on the sidelines of the IMF gathering. They must pave the way for the Eurogroup of finance ministers to make concrete decisions at their meeting next week in Sofia.

Amid expectations that the new Social Democrat finance minister will take less of a hard line than his predecessor, Mr. Scholz has sent mixed signals. Rather than any philosophical differences, the timing is forcing Mr. Scholz to show his hand. Whatever his own beliefs on the matter, he will have to walk a tightrope between approving enough relief for the IMF but not so much as to provoke a backlash at home.

Scholz has made it clear that he won’t be a pushover.

It is not only the opposition parties, the Alternative for Germany (AfD) and Free Democrats, who will pounce on any indication of being too easy on Greece. In the governing coalition, the Bavarian sister party of Chancellor Angela Merkel’s Christian Democrats would also criticize anything that smells like a clandestine bailout of a wayward euro member.

Andreas Dombret, chairman of the Bundesbank, Germany’s central bank, also opposes debt relief for Greece, saying “the problem would just start all over again,” at the IMF conference.

Mr. Scholz, who spent the past seven years as mayor of Hamburg, made it clear that he won’t be a pushover. He surprised his fellow Social Democrats by naming Jörg Kukies, formerly head of Goldman Sachs in Germany, as his state secretary for Europe. And he has further surprised them by keeping most of Mr. Schäuble’s finance ministry team on board, including those conservative-leaning officials who formulated Germany’s hard line on Greece.

Mr. Scholz made those decisions partly to avoid further disruption in the ministry after having to make room for a whole slew of new staff to help him in his role as vice chancellor. But that also signaled continuity in Germany’s euro policy.

In fact, Mr. Kukies took part in a preliminary meeting to discuss Greek debt in Brussels last week. The group of deputies prepared several plans to provide relief once the current bailout program runs out in August. One is the buyback of Greek bonds in the ECB’s portfolio as part of its asset purchase program. Subsidized credits from the ESM would finance this buyback, allowing Greece to retire expensive bonds and replace them with longer term credit on concessionary terms.

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The ESM is likely to have money left over when the bailout program runs out. Greece has only taken €46 billion ($57 billion) of the €86 billion allotted to the program. A final payout of €11 billion this summer would still leave ample funds to finance a bond buyback. But the idea of the ECB cozying up to the finance ministers in this fashion made some people uneasy about the independence of the central bank.

An alternative plan is for the euro zone members and ESM to pay Greece back the interest the ECB has earned on its bond holdings. This plan was already floated a few years ago, but the election of Prime Minister Alexis Tsipras and his efforts to escape bailout terms led the approach to be suspended. There are some €1.6 billion frozen funds from this time alone that could be paid out to Greece. Further interest would be repaid going forward. This method not only keeps the ECB from being directly involved but would also give the Eurogroup leverage to keep Greece in line on its reforms.

At the same time, creditors are working on a mechanism to provide more relief if Greece’s economic growth falters. Details are still being hammered out but the idea is to reduce the country’s debt service if the economy turns downwards. It would also cap the impact from interest payments, so that foreign investors would have the confidence that Greece would not once again be driven to the brink of bankruptcy.

Martin Greive is a correspondent for Handelsblatt based in Berlin, Ruth Berschens is head of the Brussels bureau and Jan Hildebrand leads coverage of tax, budget and economic policy from Berlin. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the authors: greive@handelsblatt.com, berschens@handelblatt.com and hildebrand@handelsblatt.com.

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