The first haircut did not provide the hoped-for relief for the Greek debt burden. But the repercussions on private investor behavior were not inconsiderable and the further deterioration of the crisis ultimately prompted Mario Draghi to make his renowned “whatever it takes” pronouncement. A public-sector haircut is also likely to have hefty side effects. Other program countries would doubtless utter similar demands, euro opponents in the donor countries would be given a fresh boost; above all, however, the drive towards a rule-bound economic and fiscal union would lose credibility if, at the end of the day, in the very first case a negotiated solution was again the upshot after all.
What is more, a further haircut would come at the wrong time for the Greek economy. The budget deficit is still high, economic growth not yet in sight. At the same time, the conditions for growth have improved markedly thanks to ongoing reforms and painful cuts. Taking unit labor costs, for instance, the Greek economy today looks substantially more competitive than just a few years ago. In such a situation, forecasting what lies ahead is a mug’s game. Following the subprime crisis the IMF had also called for more drastic action, underpinning this with horrendous losses supposedly faced by the banks. In the end, however, the IMF estimates turned out to be over the top. Of course, the Greek economy is not set to arise like Phoenix from the ashes any time soon. But as long as the debt burden does not pose a genune threat and is insulated completely completely from the capital market, there is also no need for rushed beneficence. In the current situation, the focus should remain on whether Greece, having initiated the cuts, now delivers on structural reforms.