The last thing Europe needs: another Greek debt crisis


Eurozone vs EU: what difference?

How is it for the already seen? Another debt crisis is brewing in Europe.

Greece needs European creditors to free up money from a bailout agreed in 2015 to be able to pay off its debt, but officials disagree. Investors are starting to worry, demanding higher yields on Greek debt.

Added to this is a warning from the International Monetary Fund that Greece’s debt is unsustainable and on an “explosive” trajectory, an assessment that prevents the fund from participating in a rescue.

The timing could hardly have been worse. European leaders have a lot to do. Elections are looming in the Netherlands, France, and Germany. Brexit negotiations will start in a few weeks.

However, the threat of a fall of Greece from the euro deserves our attention. Here’s why the next few weeks will be crucial:

Hammering to fall

Greece lacks liquidity but must make repayments to creditors, including the European Central Bank. Large invoices expire in July.

If Greece cannot make the payments, it will default on its debt and leave the eurozone.

Meanwhile, his latest bailout – the third since 2010 – is effectively frozen. The negotiating positions of the main players are more distant than ever since the rescue plan was agreed in June 2015.

There is even disagreement over the magnitude of the problem facing Greece.

“The latest IMF review of Greece’s debt was surprisingly pessimistic,” said Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of senior eurozone finance officials. “It is surprising because Greece is already doing better than what the report describes.”

The last thing Europe needs: another Greek debt crisis

I want everything

The IMF, Greece, and German-led creditors all have very different priorities. Here’s 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 in its first agreement in 2015 because it did not consider Greece’s debt to be sustainable. She still maintains that Greece cannot support itself without major debt relief.

Greece’s main creditors agree that Athens should implement the reforms proposed by the IMF. However, they categorically ruled out any debt relief, a position reiterated on Tuesday by eurozone finance officials.

Prime Minister Alexis Tsipras, meanwhile, shows no sign of giving in to demands for further reform. He insists that debt relief is necessary before any new concessions are made.

It’s a classic showdown and investors are watching to see which game flashes first.

To put out the fire

The next big step is a meeting of the eurozone finance ministers on February 20 – the last before the elections start to cloud European political waters. It will be even more difficult to accept additional financial aid for Greece once voters have started to vote.

After that, the invoices will start coming. Greece faces a payment to the ECB of around 1.4 billion euros in late April and an additional 4.1 billion in July.

The stakes are high.

The unemployment rate in Greece is expected to exceed 21% in 2017. Investment has fallen by more than 60% and production has contracted by more than 25% since the financial crisis. The social fabric of the country is crumbling.

If European creditors refuse further aid, Greece’s debt will get out of hand no matter how fast its economy grows, according to the IMF.

This will leave only one option: abandon the euro.

Ted Malloch, President Trump’s expected choice of U.S. ambassador to the EU, said on Greek television on Tuesday that the future of the eurozone would be decided in the next 18 months.

“There will certainly be a Europe, that the eurozone will survive, I think that is really an issue that is on the agenda,” he said. “I think this time I have to say that the odds are higher that Greece itself will come out of the euro.”

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