Another debt crisis is looming in Europe.
Greece urgently needs European creditors to release funds from a 2015 bailout agreement in order to fulfill its debt obligations. However, officials are at odds, raising concerns among investors and leading to demands for higher returns on Greek debt.
To make matters worse, the International Monetary Fund has warned that Greece’s debt is unsustainable and on a dangerous trajectory, preventing the fund from participating in a rescue. The timing couldn’t be worse, as European leaders are already occupied with upcoming elections in the Netherlands, France, and Germany, as well as the start of Brexit negotiations.
Nevertheless, the threat of Greece’s potential exit from the eurozone demands attention. The next few weeks will prove crucial in determining the outcome.
Imminent Crisis
Greece is rapidly running out of cash and must make repayments to its creditors, including the European Central Bank. Major payments are due in July. If Greece fails to meet these payments, it will default on its debt and face expulsion from the eurozone. In the meantime, the country’s third bailout, agreed upon in 2010, remains frozen, with major players at odds over the severity of Greece’s problem.
“The IMF’s latest assessment of Greece’s debt position was surprisingly pessimistic,” stated Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of top eurozone finance officials. “This is surprising because Greece is actually performing better than the report suggests.”
Clashing Priorities
The IMF, Greece, and creditors led by Germany each have different priorities:
The IMF is pushing Greece to implement more substantial economic reforms, including labor market reforms. It did not participate in the third bailout due to its belief that Greece’s debt was unsustainable. The IMF still maintains that significant debt relief is necessary for Greece to achieve long-term stability.
Greece’s main creditors agree on the need for implemented reforms, but they categorically reject any debt relief, a stance reiterated by eurozone finance officials. Greek Prime Minister Alexis Tsipras, on the other hand, refuses to make additional reforms without a commitment to debt relief. This has created a classic standoff with investors eagerly observing which party will give in first.
Critical Times Ahead
The next major milestone will be a meeting of eurozone finance ministers scheduled for February 20, which is the last meeting before elections begin in Europe. Reaching an agreement on further financial aid for Greece will only become more difficult as elections impact decision-making. Following this, Greece faces significant debt repayments to the ECB in late April and July. The stakes are high, as Greece’s unemployment rate is projected to be over 21% in 2017, with investment down more than 60% and output contracting over 25% since the financial crisis. If European creditors refuse further assistance, Greece’s debt will become unmanageable, regardless of any economic growth, ultimately leaving the country with no choice but to abandon the euro. Ted Malloch, President Trump’s expected choice for U.S. ambassador to the EU, recently stated that the eurozone’s future would be decided within the next 18 months, suggesting that the odds of Greece leaving the euro are higher than ever.
CNNMoney (London)First published February 8, 2017: 12:27 PM ET
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