Greece, the never-ending crisis in Europe

Greece, the never-ending crisis in Europe
Managing Director of the International Monetary Fund (IMF) Christine Lagarde.
PHOTO: AFP

We could be getting closer to yet another make-or-break-moment between Greece and its international creditors.

On one side, European creditors are demanding Greece to implement further austerity measures in exchange for new funds.

On the other side, the Greek government is struggling to find the balance between pleasing voters and creditors.

Without fresh payments, Greece will struggle to repay its creditors in the summer, resurfacing fears that Athens could end up defaulting on its debt and, in theory, crashing out of the euro.

"The current impasse is essentially because Greece is not implementing all the prior actions (austerity measures that Greece pledged to complete in its bailout programme)," an official close to the bailout talks, who asked to remain anonymous due to the controversial nature of the issue, told CNBC on Tuesday.

The Greek 2-year bond yield rose to near 10 per cent on Tuesday morning - the highest level since June of last year, when there were also similar tensions between the EU and Greece.

Some analysts said that Tuesday's move was due to divisions within the International Monetary Fund over the best course of action for Greece.

Over the past eight years Greece has had to make a series of stinging cutbacks and reforms to right its economy and continue getting bailout loans so it can pay down its debt.

The IMF said in a report Monday that "most (IMF) directors agreed that Greece does not require further fiscal consolidation at this time, given the impressive adjustment to date which is expected to bring the medium-term primary fiscal surplus to around 1.5 per cent of GDP, while some directors favoured a surplus of 3.5 per cent of GDP by 2018."

However, this split is along international lines, the official told CNBC. The current stalemate is mainly between the European creditors and Greece.

The former wants to see reforms on Greece's labour and product markets as well as on the energy sector and a higher fiscal surplus, while the rest of the world is happier to cut the Athens government some slack.

European officials also want an agreement on the country's fiscal strategy after the current bailout programme concludes in 2018.

This means that creditors want Greece to legislate measures that will be implemented only after 2018 and thus do not mean further austerity for the time being.

Such measures are essential for European creditors so they have guarantees that allow them to reduce Greece's debt burden.

"If a deal is not achieved, the EU election calendar probably will make any agreement impossible until the summer. This will bring us precariously close to its next scheduled Greek 10.5 billion euro payment to its creditors," Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics said in a research note last week.

"Experience tells us that leaving it to the last minute incentivizes politicians to play brinkmanship, with adverse consequences for the economy," he added.

As the official pointed out, "We've seen this movie several times before."

Without Greece implementing reforms , further disbursements are at risk. Without Greece's legislating for after the programme, debt relief doesn't happen.

Without a clear deal on debt relief, the IMF will not participate in the programme, as least financially - something that countries such as Germany, Austria, the Netherlands and Finland want.

"Patience, especially in Germany, is wearing thin," Vistesen said in the note. "Greece can't be kicked out of the euro zone, but we think that the EU will push Syriza towards the edge quicker this time.

Giving Greece "a break" from the euro would not be easy to manage, but some EU politicians might prefer it," he added.

Such an impasse could be another drag on the economy at a time when Athens managed to escape recession in the second part of 2016.

"The uncertainty around Greece's euro membership in the first half of 2015 knocked the economy off its feet. Deposit outflows and outflows from Athens-based money market funds will give the first signs that the market is pricing a risk o f a Greek exit from the euro zone," Vistesen added.

If Greece and the EU do not come significantly closer in the coming weeks, we should get ready to see the same scenario.

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