The last thing Europe needs: another Greek debt crisis

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The Eurozone and the European Union: What's the difference?

How does this feel about deja vu? Another debt crisis is brewing in Europe.

Greece needs European creditors to release cash from the rescue plan reached in 2015 in order to repay debts, but officials are divided. Investors are beginning to worry, demanding higher returns on Greek debt.

What makes the situation worse is the warning from the International Monetary Fund that Greece’s debt is unsustainable and on an “explosive” road. This assessment prevents the fund from participating in the rescue.

The timing couldn’t be worse. European leaders have a lot to do. Elections in the Netherlands, France and Germany are imminent. Brexit negotiations will begin in a few weeks.

However, the threat of Greece’s withdrawal from the euro zone requires attention. This is why the next few weeks will be key:

One hammer fall

Greece is about to run out of cash, but it needs to repay debts to creditors, including the European Central Bank. The main bill will be due in July.

If Greece cannot repay its debts, it will default on its debts and exit the Eurozone.

At the same time, its latest rescue plan—the third rescue since 2010—has actually been frozen. Since the rescue agreement was reached in June 2015, the negotiating positions of the major players have been more divided than ever.

There are even disagreements on the scale of the problems facing Greece.

“The IMF’s latest assessment of the debt situation in Greece is unexpectedly pessimistic,” said Dutch Finance Minister Jeroen Dijsselbloem, who chaired the meeting of senior euro zone financial officials. “This is surprising because Greece has performed better than the report describes.”

I want it all

Creditors led by the International Monetary Fund, Greece and Germany all have very different priorities. This is what everyone wants:

The International Monetary Fund called on Greece to carry out more ambitious reforms of its economy, including labor market reforms. The IMF did not join the third rescue plan when it first agreed in 2015 because it believed that Greece’s debt was unsustainable. It still insists that without major debt relief, Greece cannot be self-sufficient.

Greece’s main creditors agreed that Athens should implement the reforms proposed by the International Monetary Fund. However, they categorically ruled out the possibility of any debt relief, and Eurozone finance officials reiterated this position on Tuesday.

At the same time, Greek Prime Minister Alexis Tsipras showed no signs of succumbing to additional reform demands. He insisted that debt relief was needed before any new concessions were made.

This is a typical deadlock, and investors are paying attention to which side blinks first.

Put out the fire

The next important milestone is the meeting of euro zone finance ministers on February 20, the last meeting before the elections start to disrupt European political waters. Once voters start voting, agreeing to provide more financial aid to Greece will become more difficult.

After that, the bill will begin to expire. Greece will pay approximately 1.4 billion euros to the European Central Bank in late April, and another 4.1 billion euros to the European Central Bank in July.

The stakes are high.

The unemployment rate in Greece in 2017 is expected to exceed 21%. Since the financial crisis, investment has fallen by more than 60% and output has shrunk by more than 25%. The social structure of the country is breaking down.

According to the International Monetary Fund, if European creditors refuse further help, no matter how fast its economy grows, Greece’s debt will get out of control.

There will be only one option left-to abandon the euro.

President Trump’s prospective candidate for the US ambassador to the European Union, Ted Malloch, told Greek TV on Tuesday that the future of the euro zone will be decided in the next 18 months.

“Of course there will be a Europe. Whether the Eurozone will survive or not, I think this is largely an issue on the agenda,” he said. “I think this time I have to say that Greece is more likely to leave the euro zone on its own.”

CNNMoney (London) First published on February 8, 2017: 12:27 PM Eastern Time


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