Does Greece Need Another Bailout?

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Greece will need another financial assistance program beyond the agreed bailout programs if the country is to avoid going into default, according to European Central Bank board member Jörg Asmussen.

The current bailout program only gives assistance through 2014, but Asmussen says the government in Athens is unlikely to return to finance its debt on financial markets in 2015 and 2016, thus necessitating further aid.

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Asmussen expressed his concerns on German public broadcaster ZDF on Sunday. But his opinion is likely to be an unpopular one in the country and elsewhere in the euro zone. Many of Greece’s partners in the 17-nation euro zone, including German Chancellor Angela Merkel, will likely resist more long-term assistance.

International creditors have been supporting Greece since 2010, pledging rescue loans worth 240 billion euros through 2014 because the country could no longer refinance its debt on its own, threatening a possible default.

Now, a much deeper than expected recession and Athens’ delays in implementing austerity measures have created a new budget shortfall of around 30 billion euros under the current bailout program. On Tuesday, euro-zone finance ministers, the European Central Bank, and the International Monetary Fund will meet to decide how to address that shortfall.

According to Asmussen, the meeting this week is meant to settle the financing for 2013 and 2014, but not the potential need for further financing in 2015 and 2016. Now they will have to address the possibility of longer-lasting financial troubles in Greece, where creditors had initially hoped the debt burden could be reduced to 120 percent of gross domestic product by 2020.

With Greece’s debt forecast to hit 190 percent of GDP next year, that goal now seems unachievable. Some creditors have proposed granting the country an extra two years, until 2022, to meet the target.

Greece’s debt position, measured relative to its economic output, is being hurt by a sixth straight year of recession. Now economists worry that fresh loans won’t be enough, and that euro-zone creditors may also have to forgive some of their debt.

Asmussen is among those who believe that loans alone won’t save Greece. While they’ll close the financing gap, he said, they also increase the country’s debt, and its drawn-out recession means Greece doesn’t have the funds, and is unlikely to have the funds in the near future, to start paying down its debt.

German central bank chief Jens Weidmann agrees with Asmussen. Weidmann, who also sits on the ECB’s governing council, said on Friday that creditors will have to take a so-called haircut on their Greek debt holdings, an option that many European political leaders staunchly oppose.

So far, prolonged recessions throughout the euro zone have seen many leaders ousted, including the Prime Ministers of Spain and Italy and the President of France. Granting Greece a write-off means telling voters that billions in taxpayers’ money will be permanently lost.

Some politicians still hold out hope that if Greece would just push through the budget cuts and structural reforms it agreed to, that it could still dig itself out of its debt hole without dragging down its partners in the euro zone. The country has already decided upon cuts and reforms, but has yet to implement them.

German Finance Minister Wolfgang Schaeuble is among those who oppose the write-off, which he says would reduce Greece’s incentive to reform and thus prolong the crisis, hurting both Greece and its euro-zone partners in the long run.

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