Greece's creditors will eventually have to write down the value of the country's debt further, but only after Athens has done the hard work of getting its budget into shape and reforming its economy, Germany's top central banker said Friday.
The comments from Bundesbank President Jens Weidmann, who is also a member of the European Central Bank's governing council, came days ahead of a meeting where Greece's partners in the euro are expected to sign off the release of the next batch of bailout cash that is needed to keep the country afloat.
Weidmann told a gathering of business leaders in Berlin that Greece's finances were an exception within the 17-nation eurozone because the country's debt level "is not sustainable."
However, he said that problem can only be fixed after the country's politicians deliver on the promises they have made to steer Greece back to financial health.
Weidmann insisted granting the country more debt relief now - a so-called haircut - would reduce the pressure on Athens and weaken its ambition to undertake the necessary reforms. It's a measure that the German government, a major contributor to the rescue effort, also opposes.
However, Weidmann said a haircut "will be necessary at the end" so Greece can "regain access to capital markets."
He hinted that Greece could be given a pledge as some sort of carrot now, promising that its eurozone creditors will eventually forgive some debt, giving Greek leaders a further incentive to push through reforms. The relief, however, would not come until all agreed measures are pushed through, he added.
"We have seen drastic reforms here, but they are not yet sufficient," Weidmann said. "The path that we have in front of us is still a long one."
Greece has been shut out of capital markets since its debt crisis erupted three years ago.
Earlier this year, Greece reached a deal with private creditors to wipe some (EURO)100 billion ($128 billion) off the national debt. But governments that have loaned money to Greece and other public-sector creditors were spared, and Greece's debt load is currently still growing as the country's economy continues to shrink - the country is headed for its sixth straight year of recession.
The plan agreed to earlier this year alongside the private sector write-down and another bailout with the eurozone and the International Monetary Fund was to reduce Greece's debt burden to 120 percent of its gross domestic product by 2020.
Those creditors so far pledged loans worth (EURO)240 billion, but a much deeper than expected recession and delays in implementing austerity measures and reforms have led to a bigger than anticipated budget shortfall. Few now expect Greece to meet that 2020 target now and that's raised concerns that Greece needs another (EURO)30 billion to cover the shortfall.
Eurozone finance ministers will meet Tuesday to discuss how to plug that shortfall and, above all, how to ensure Greece's debt - forecast to hit 190 percent of GDP next year - can be brought on track toward the 120 percent level that is considered sustainable.
Many economists say that Greece's public-sector creditors will eventually have to forgive some of the country's debt. That option, however, is unpalatable to many political leaders - not least Germany's Chancellor Angela Merkel - because they loathe the idea of telling voters that billions in taxpayers' money will be lost.
"One might well wonder whether the leap of faith that one grants if a debt haircut is done today sets the right incentives now, or whether it would not make sense to promise a haircut, which will be necessary at the end to regain access to capital markets, for when the reforms - which are the actual goal - will have been implemented," Weidmann said.
"A haircut does not yet solve the problems. I can do a haircut today but if the budget as such is not sustainable then I'll be back in the same situation in 10 years," he added. "That wouldn't make sense."
Weidmann also argued that granting Greece debt relief now would in effect create moral hazard - leading to a situation in which leaders in other bailed-out nations, such as Portugal and Ireland, would no longer be able to push austerity measures and reforms through their parliaments.
"This is what is on my mind," Weidmann said. "That is, how can you maintain that pressure to act?"
"All measures that only provide financing can only buy time, the (crisis) causes can only be addressed by the politicians in those countries," he added.
At the same event Weidmann was speaking at, the head of Europe's rescue fund, Klaus Regling, defended Greece's achievements in slashing its budget and lowering labor costs. He said Greece's adjustment program is already tougher than most comparable previous IMF programs.
Juergen Baetz can be reached on Twitter at http://www.twitter.com/jbaetz