What do you think of déjà vu? Another debt crisis is brewing in Europe.
Greece needs European creditors to release cash from a bailout agreed in 2015 so it can pay off the debt, but officials disagree. Investors are starting to worry and are demanding higher yields on Greek debt.
Adding to the confusion is a warning from the International Monetary Fund that Greece’s debt is unsustainable and on an “explosive” path, an assessment that prevents the fund from participating in a bailout.
The timing couldn’t be worse. European leaders have a lot to do. Elections are coming up in the Netherlands, France and Germany. Brexit negotiations will begin in a few weeks.
However, the threat of Greece exiting the euro demands attention. Here’s why the next few weeks will be key:
The hammer will fall
Greece is running out of cash but needs to make payments to its creditors, including the European Central Bank. The largest bills will be due in July.
If Greece cannot make payments, it will default on its debt and leave the eurozone.
Meanwhile, its latest bailout, the third since 2010, is effectively frozen. The negotiating positions of the main players are further apart than at any time since the bailout was agreed in June 2015.
There is even disagreement about the magnitude of the problem facing Greece.
“The IMF’s latest review of Greece’s debt position was surprisingly pessimistic,” said Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of the euro zone’s top financial officials. “It’s surprising because Greece is already doing better than that report describes.”
I want it all
The IMF, Greece and German-led creditors have very different priorities. This is what everyone wants:
The IMF has called on Greece to make more ambitious changes to its economy, including labor market reforms. The IMF did not join the third bailout when it was first agreed in 2015 because it did not consider Greece’s debt sustainable. He still maintains that Greece cannot be self-sufficient without major debt relief.
Greece’s main creditors agree that Athens should implement the reforms proposed by the IMF. However, they have categorically ruled out any debt relief, a position reiterated by eurozone finance officials on Tuesday.
Meanwhile, Greek Prime Minister Alexis Tsipras shows no signs of giving in to demands for further reforms. He insists debt relief is necessary before making new concessions.
It’s a classic matchup and investors are watching to see which party flashes first.
Put out the fire
The next major milestone is a meeting of eurozone finance ministers on February 20, the last before elections begin to muddy Europe’s political waters. Agreeing on even more financial aid for Greece will be even more difficult once voters start voting.
After that, invoices will begin to become due. Greece faces a payment to the ECB of approximately 1.4 billion euros at the end of April and another 4.1 billion euros in July.
There is a lot at stake.
The unemployment rate in Greece is expected to exceed 21% in 2017. Investment is down more than 60% and production has contracted more than 25% since the financial crisis. The social fabric of the country is fraying.
If European creditors refuse more aid, Greece’s debt will spiral out of control no matter how fast its economy grows, according to the IMF.
That will leave only one option: abandon the euro.
Ted Malloch, President Trump’s expected choice for US ambassador to the EU, told Greek television on Tuesday that the future of the eurozone would be decided in the next 18 months.
“There will certainly be one Europe; whether the eurozone will survive, I think is a question that is on the agenda,” he said. “I think this time I would have to say that the chances of Greece itself leaving the euro are greater.”
CNNMoney (London) First published February 8, 2017: 12:27 pm ET