Peter Eavis reports: Europe’s most powerful policy makers dismiss the idea, investors fear it, and it would almost certainly face fierce resistance from within the Continent’s richer countries.

Yet talk of slashing the government debt loads of European countries, starting with Greece, is back. For all the opposition, the idea has resurfaced with a vengeance in recent days as the new government in Athens, facing a cash squeeze and aiming to make life easier for its citizens, looks for immediate ways to reduce what it owes. The pressure on Greece increased on Wednesday when the European Central Bank cut off direct funding to Greek banks, forcing them to rely instead on emergency loans from the country’s own central bank. The move followed a meeting in Frankfurt between Mario Draghi, the central bank’s president, and Yanis Varoufakis, Greece’s new finance minister, and appeared to signal a hard line in negotiations over debt. The E.C.B.’s announcement roiled markets in the United States late in the trading day.

At the heart of Greece’s problems is its eye-popping government debt load, equivalent to 175 percent of the country’s gross domestic product. Now, as Greece’s nightmare grinds on, some economists fear that high debt levels could hamper recoveries in other countries. That is why they are pressing for policies that would alleviate the debts of other European nations, to help get the region out of its rut.

“Greece is more acute, but it is not as completely different as it is portrayed,” said Kenneth Rogoff, an economics professor at Harvard. The economies of Spain, Portugal and Ireland, he added, might benefit from such “haircuts” to their obligations. Podemos, a Spanish political party that has surged in popularity in recent months, wants to restructure the country’s government debt to make it less of a burden. [Continue reading…]