01 February 2016

POLITICO: Why we’re not safe from Grexit yet

[...]Greece’s creditors are heading to Athens this week to discuss Greece’s first review under the third bailout program.

As has been the case many times before in Greece, this review should already have been completed and the funds released.

The main sticking point is pension reform. The third bailout program calls for pension cost savings of 1 percent of GDP in 2016. The government has implemented measures achieving two thirds of that the target so far, leaving a gap of roughly €600 million. [...]

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There are a number of reasons why we can expect creditors to play hardball with Greece. First of all, the risk of pushing the current government to the point of collapse is no longer the deterrent it once was. Since the beginning of the Greek bailouts in 2010, successive governments argued the creditors were better off negotiating with them than with an anti-bailout opposition party. This argument no longer holds true. [...]

Secondly, the IMF has not yet decided if it will participate in the third bailout. It has said it would only be willing to take part if Greece’s debt is sustainable, which either entails debt relief or an even more painful fiscal adjustment for Greece. So far the other creditors have shown little appetite for debt relief. Eurogroup chief Jeroen Dijsselbloem recently said the eurozone may be able to consider debt relief for Greece in 10 or 15 years. [...]

Thirdly, Greece’s debt crisis is only one of a number of crises that Europe currently faces, among which the overwhelming influx of refugees, Britain’s renegotiations on its position in the Union, and the ongoing Ukrainian crisis loom large.

The Greek government seems to think that this means Merkel, who has come under increasing political pressure for her stance on refugees, will offer Greece concessions to close the first review without too much trouble. But given the toxic politics between the two countries, the opposite seems more likely. [...]

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The hard deadline for agreeing the first review and releasing funds for Greece is when Greece runs out of money and cannot afford a debt repayment. This will come in July, when Greece has over €3.5 billion in debt to roll over. [...]

As Greece faces a financing crunch in July, it will also likely see the influx of refugees hit fever pitch. In the absence of a coherent and effective European migration policy before July, it’s hard to imagine Greece avoiding expulsion from Schengen — and with the new line for Europe drawn at Greece’s northern borders, Greece will be one step closer to being out of the European project.

Last summer, Schäuble suggested Greece take a temporary break from the eurozone, and relations between Germany and Greece have only deteriorated since. It is likely Schäuble will put his proposal back on the table this summer. Greece’s fate may ultimately be determined by how much solidarity there really is in Europe — in which case, the future looks grim.

Full article on POLITICO

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