Greece: Will Germany Bend On Debt 'Haircut' After IMF's Surprise Move In Advocating One?

A week is a long time in politics, an old saying goes, and never has that seemed more true than in the case of Germany's position this week on Greece's debt obligations. After having pushed Greece on Sunday to accept a deal including unpopular austerity measures, Germany now unexpectedly faces mounting pressure to cede ground on an issue it has opposed vehemently -- debt relief for Greece.

On Sunday, Greece's government agreed to accept a third bailout from German-led international creditors. The deal included austerity measures harsher than the ones Greek voters had rejected in a referendum earlier this month, and rebuffed Greek demands for debt restructuring or a so-called “haircut.”

On Wednesday, however, a leaked report from the International Monetary Fund (IMF), another one of Greece's international creditors, branded the country's debt “highly unsustainable,” and urged debt relief on a scale "well beyond what has been under consideration to date," a sharp departure from Germany's position.

The body warned European Union (EU) nations that it would not participate in future bailouts of Greece without some form of debt relief. Greece's debt, currently at 177 percent of its GDP, is likely to rise to almost 200 percent in the next two years, the IMF said.

This level of public debt is widely seen as unsustainable. Germany's most powerful EU partner, France, is also backing the IMF's stance. French Finance Minister Michel Sapin said Wednesday: "The IMF is saying the same thing as we are ... we cannot help Greece if we maintain the same debt reimbursement burden on the Greek economy," Reuters reported.

Many notable economists have also been calling for some measure of debt relief for Greece, with Nobel Prize-winning economist Paul Krugman being one of the most high-profile public intellectuals calling for such measures.

All this raises the question: will Germany be pressured to soften its position on Greek debt relief? There are a number of forces at play that could impact any decision, both inside and outside the country.

Germany is not alone in its desire to refrain from writing down Greece's mountainous debt. Other EU nations, such as Ireland and Portugal, have already endured years of austerity after EU bailouts, and fiercely oppose any debt reduction for Greece. One Irish lawmaker suggested this week that the government's opposition to a Greek debt reduction was based on not wanting Greece to succeed where it had failed, the Irish Times reported.

In addition, several eastern European countries including Finland, Latvia, Slovenia and Estonia have also been vocal in their opposition to what they see as a subsidizing of Greek profligacy. Many of these countries have had to implement painful austerity measures to deal with the fallout from the global financial crisis in recent years, and have a significantly lower standard of living than Greece does.

What remains key, however, is German public opinion, which remains firmly opposed to any concessions to Greece. A poll conducted in Germany shortly after Greece's July 5 referendum found that 60 percent of Germans supported a “Grexit” -- Greece's exit from the euro -- and a large majority of voters approved of the performance of Chancellor Angela Merkel and her hard-line finance minister Wolfgang Schaeuble, according to the Nation.

In a signal that Germany appears not to be changing direction for the immediate future, Schaeuble said Thursday that he still thought a temporary “Grexit” was a good idea, Reuters reported, adding that a debt haircut would be incompatible with Greece's continuing membership of the euro.

Whether Germany can be pressured into changing its position on Greek debt remains to be seen, but dramatic moves on the issue, at least in the near term, seem unlikely. An analysis from Reuters suggests that Merkel's next move may be an “extend and pretend,” strategy, where no official write-off of debt was announced, but small loan extensions could be engineered to become debt cuts to Greece without drawing much public scrutiny or political blowback.

Ultimately, as an exporting powerhouse, Germany has a financial incentive to protect the European free trade area. If nations could withdraw from the European Union and create trade barriers, then Germany would be living in a world of tariffs -- a scenario the country would strongly like to avoid, Stratfor reported. In addition, being already on the hook for so much Greek debt, Germany may come to see Greek economic growth fueled by debt reduction as a credible means to achieve some level of repayment.

However, if the negotiations of the last few months have demonstrated anything, it is that the Greek crisis is not only an economic problem, but a political one also. European negotiators spoke of a lack of trust in Greece in the run-up to the agreement of this week's bailout deal, and a great deal of bad blood has built up between Greece's Syriza-led government and their eurozone counterparts during months of negotiations this year.

Whatever the economic arguments, if Europe runs out of patience with Greece, more drastic measures are still possible.