Déjà vu? Another financial crisis is looming in Europe.
Greece is in need of cash from European creditors to fulfill its debt repayments, but negotiations have come to a stalemate, causing concern among investors who are demanding higher returns on Greek debt.
The situation is further complicated by the International Monetary Fund (IMF) warning that Greece’s debt is unsustainable and on a dangerous path, making it impossible for the IMF to participate in a rescue plan.
The timing couldn’t be worse as European leaders have a lot on their plate, with upcoming elections in the Netherlands, France, and Germany, and Brexit negotiations starting soon.
However, the threat of Greece leaving the eurozone demands attention. Here’s why the next few weeks are crucial:
A tough situation ahead
Greece is running out of money and needs to make repayments to European Central Bank and other creditors. Major payments are due in July.
If Greece fails to make these payments, it will default on its debt and exit the eurozone.
In the meantime, Greece’s latest bailout, the third since 2010, is stuck. The negotiating positions of key players are more divided than ever since the bailout was agreed upon in June 2015.
Even the scale of the problem facing Greece is a subject of dispute.
“The IMF’s latest review of Greece’s debt position was surprisingly negative,” said Jeroen Dijsselbloem, the Dutch finance minister who leads meetings of top eurozone finance officials. “It’s surprising because Greece is already performing better than that report suggests.”
Different priorities
The IMF, Greece, and its main creditors led by Germany all have distinct priorities. Here’s what each party wants:
The IMF is urging Greece to enact more far-reaching changes to its economy, including labor market reforms. The IMF didn’t participate in the third bailout because it believed Greece’s debt was unsustainable. It still maintains that major debt relief is necessary for Greece to stand on its own.
Greece’s main creditors agree on the need for the reforms proposed by the IMF. However, they categorically reject any debt relief, a position reinforced on Tuesday by eurozone finance officials.
Greek Prime Minister Alexis Tsipras, on the other hand, shows no signs of yielding to demands for additional reforms. He insists that debt relief must come before any further concessions are made.
It’s a classic standoff, and investors are watching closely to see which side gives in first.
Contain the crisis
The next major deadline is a meeting of eurozone finance ministers on February 20, which is the final one before elections start complicating Europe’s political landscape. Agreeing on more financial aid for Greece will become even more challenging once voters begin casting their ballots.
After that, bills will start coming due. Greece has to pay the ECB around €1.4 billion in late April and another €4.1 billion in July.
The stakes are high. The unemployment rate in Greece is expected to remain above 21% in 2017. Investment has dropped by more than 60%, and output has contracted by over 25% since the financial crisis. The country’s social fabric is unraveling.
If European creditors refuse to provide further assistance, Greece’s debt will become uncontrollable, regardless of how quickly its economy recovers, according to the IMF.
That will leave only one option: leaving the eurozone.
Ted Malloch, the expected choice for U.S. ambassador to the EU under President Trump, stated in an interview on Greek television that the future of the eurozone would be decided within the next 18 months.
“Certainly there will be a Europe, whether the eurozone survives or not. I think it’s a question that is on the agenda,” he said. “I think this time I would have to say that the odds are higher that Greece itself will exit the euro.”
CNNMoney (London) First published February 8, 2017: 12:27 PM ET
