The last thing Europe needs: another Greek debt crisis

Eurozone vs.  EU: What is the difference?

How’s that for déjà vu? Another debt crisis is brewing in Europe.

Greece needs European creditors to release cash from a bailout agreed in 2015 so it can repay debt, but officials disagree. Investors are starting to worry and are demanding a higher yield on Greek debt.

Adding to the confusion is the International Monetary Fund’s warning that Greece’s debt is unsustainable and on an “explosive” path, an assessment that prevents the fund from participating in a bailout.

The timing couldn’t be worse. European leaders have a lot on their plate. Elections are coming up in the Netherlands, France and Germany. Brexit negotiations will begin in a few weeks.

However, the threat of Greece leaving the euro calls for attention. Here’s why the next few weeks will be key:

Hammer to fall

Greece is running out of cash but must pay creditors, including the European Central Bank. The main bills will be sold in July.

If Greece can’t make the payments, it will default on its debt and leave the eurozone.

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

There is even disagreement about the size of the problem facing Greece.

“The latest IMF review of Greece’s debt position was surprisingly pessimistic,” said Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of the eurozone’s top financial officials. “It’s surprising because in Greece it’s already doing better than the report describes.”

i want it all

The IMF, Greece and the German-led creditors have very different priorities. Here’s what everyone 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 was first agreed in 2015 because it did not consider Greece’s debt sustainable. He still maintains that Greece cannot be self-sustaining without major debt relief.

Greece’s main creditors agree that Athens should implement the reforms proposed by the IMF. However, they have categorically ruled out any debt relief, a position that was reiterated on Tuesday by the financial officials of the euro zone.

Greek Prime Minister Alexis Tsipras, meanwhile, shows no sign of giving in to demands for additional reforms. He insists that the debt must be reduced before making new concessions.

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

Turn off the fire

The next important milestone is the meeting of eurozone finance ministers in February. 20 — the last one before the elections that begin to muddy Europe’s political waters. Agreeing to more financial aid for Greece will be even more difficult when voters go to the polls.

After that, the bills will start coming. Greece faces a payment to the ECB of approximately 1.4 billion euros at the end of April and another 4.1 billion euros in July.

The stakes are high.

The unemployment rate in Greece is expected to exceed 21% in 2017. Investment has fallen by more than 60% and output has contracted by more than 25% since the financial crisis. The social fabric of the country is being torn apart.

If European creditors refuse more aid, Greece’s debt will spiral out of control no matter how fast its economy grows, according to the IMF.

This will leave only one option: leave the euro.

Ted Malloch, President Trump’s expected pick for 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, if the eurozone survives, I think it’s very much a question that’s on the agenda,” he said. “I think this time I would have to say the odds are higher that Greece itself will leave the euro.”

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

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