The last thing Europe needs: another Greek debt crisis

Eurozone vs EU: What's the difference?

How is this for déjà vu? Another debt crisis is brewing in Europe.

Greece needs European creditors to free up cash from a bailout agreed in 2015 so it can repay, but officials have yet to accept it. Investors are starting to worry, demanding higher yields on Greek debt.

Adding to the confusion was a warning from the International Monetary Fund that Greece’s debt was unsustainable and was on the verge of “exploding,” a rating that prevented the fund from participating in a rescue.

Times could hardly be worse. European leaders have a lot on their plate. Elections are taking place in the Netherlands, France and Germany. Brexit negotiations will begin within weeks.

However, the threat of Greece’s departure from the euro remains to be seen. Here’s why the next few weeks will be key:

Hammer falling

Greece is running out of cash, but it needs to repay its creditors, including the European Central Bank. Major bills are due in July.

If Greece is unable to make the payments, it will default on its debt and be kicked out of the eurozone.

Meanwhile, its latest bailout – the third since 2010 – is effectively frozen. The major players’ negotiating positions are further apart than at any time since the bailout was agreed in June 2015.

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

Jeroen Dijsselbloem, Dutch Finance Minister, who chairs meetings of top euro zone finance officials, said: “The IMF’s latest assessment of Greece’s debt situation is pessimistic. surprising way. “It’s surprising because Greece has done better than what the report describes.”

I want it all

The IMF, Greece and Germany-led creditors all have very different priorities. Here’s what each one 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 first agreed in 2015 because it did not consider Greece’s debt to be sustainable. It still argues that Greece cannot sustain itself without massive debt relief.

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

Meanwhile, Greek Prime Minister Alexis Tsipras shows no sign of giving in to demands for additional reforms. He insists that debt forgiveness is required before any new concessions can be made.

It’s a classic stalemate and investors are watching to see which side blinks first.

Extinguish the fire

The next big milestone is the meeting of euro zone finance ministers on 20 February – the last before elections start to rattle Europe’s political waters. Agreeing more financial aid to Greece will become even more difficult once voters start voting.

After that, the bills will begin to come due. Greece faces payments to the ECB of about 1.4 billion euros at the end of April and another 4.1 billion euros in July.

High stakes.

Unemployment in Greece is expected to be above 21% in 2017. Investment is down more than 60% and output is down more than 25% since the financial crisis. The country’s social fabric is frayed.

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

That would leave only one option – give up the euro.

Ted Malloch, President Trump’s expected choice for the position of US ambassador to the EU, told Greek television on Tuesday that the future of the eurozone will be decided in the next 18 months.

“There will certainly be a Europe, whether the eurozone exists or not, I think that is very much a question on the agenda,” he said. “I think this time I will have to say that it is more likely that Greece itself will get out of the euro.”

CNNMoney (London) First published February 8, 2017: 12:27 PM ET The last thing Europe needs: another Greek debt crisis

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