What about déjà vu? Another debt crisis is underway in Europe.
Greece needs European creditors to release cash from a 2015 agreed bailout so it can make its debt repayments, but officials are at odds. Investors are starting to worry and demand higher returns on Greek government bonds.
Adding to the turmoil is a warning from the International Monetary Fund that Greece’s debt is on an unsustainable and “explosive” path, an assessment that prevents the Fund from participating in the bailout.
The timing was hardly bad. European leaders have a lot on their hands. Elections are looming in the Netherlands, France and Germany. Brexit negotiations will begin in the next few weeks.
But the threat of Greece falling out of the euro is something to watch out for. Here’s why the next few weeks are key:
falling hammer
Greece is short on cash but needs to pay back its creditors, including the European Central Bank. His major bill is due in July.
If Greece fails to pay, it will default and spiral out of the eurozone.
Meanwhile, the latest bailout, the third since 2010, is effectively frozen. Since the bailout was agreed in June 2015, the negotiating positions of the major players are farther apart than at any point in time.
There is also disagreement about the magnitude of the problem facing Greece.
“The recent IMF review of Greece’s debt situation was surprisingly pessimistic,” said Dutch Finance Minister Jeron Dieselbloom, who chairs the eurozone finance ministers’ meeting. “Surprisingly, Greece is already doing better than reported.”
i want it all
Creditors led by the IMF, Greece and Germany all have very different priorities. Here are their wishes:
The IMF called on Greece to undertake more ambitious economic reforms, including labor market reforms. The IMF did not see Greece’s debt as sustainable, so it did not participate in the third bailout when it was first agreed in 2015. He continues to insist that Greece cannot stand on its own without massive debt relief.
Greece’s main creditors agree that Athens must implement reforms proposed by the IMF. But they have categorically ruled out debt relief, a position echoed by eurozone monetary officials on Tuesday.
Greek Prime Minister Alexis Tsipras, meanwhile, shows no sign of bowing to calls for more reforms. He argues that debt relief is needed before new concessions are made.
It’s a classic stalemate, with investors waiting to see which party blinks first.
Extinguish the fire
The next major milestone will be the Eurozone Finance Ministers’ Meeting on 20 February. This is the last meeting before elections begin to roil European political waters. Once voters start voting, it will become even harder to agree to further financial aid to Greece.
After that, the bill payment deadline begins. Greece faces payments to her ECB of around €1.4 billion in late April and another €4.1 billion in July.
The stakes are high.
Greece’s unemployment rate is expected to exceed 21% in 2017. Since the financial crisis, investment has fallen by more than 60% and output has contracted by more than 25%. The social fabric of the country is frayed.
According to the IMF, if European creditors refuse to provide further assistance, Greece’s debt will spiral out of control, no matter how fast the Greek economy grows.
The only option left is to abandon the euro.
Ted Malloch, who is expected to be Trump’s nominee for US ambassador to the EU, told Greek television on Tuesday that the future of the eurozone will be decided in the next 18 months.
“It will certainly be Europe whether the eurozone survives or not. I think that is a very important issue on the agenda,” he said. This time, I would have to say that Greece itself is likely to leave the euro.”
CNNMoney (London) First published February 8, 2017: 12:27 PM ET
