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Grexit Ghost to Haunt Europe (Again)

Europe

The Greek debt crisis is likely to resurface as the year progresses towards the summer of 2017.

The country is on track to become (once again) the focus of markets as well as parliaments, as there appears to be no consensus on the ongoing rescue package and debt relief measures, while important debt interest payments of EUR 7bn are due in July 2017. In a nutshell, the latest tranche of the third bailout for Greece is at stake, because Greece has failed so far to implement the majority of the latest reform requests made by the European Commission, IMF and ECB. These reforms include pension and “hire and fire” labour market reforms.

Across the table, creditors seem to be far from agreeing on a common position as to whether Greece´s debt is sustainable.While the IMF stated in its latest assessment that it has serious reservations about the ambitious growth targets that Greece must meet in order to achieve debt sustainability, the EU´s position is far more optimistic. The IMF projects debt to reach 275% of GDP by 2060 – even if Greece were to fulfil all reform obligations. According to the IMF´s baseline scenario, Greece´s debt is “highly unsustainable” and will “become explosive” after 2030. According to the IMF, a substantial restructuring of European loans (by extending grace periods and maturity dates on the loans) is necessary in order to achieve debt sustainability. The European position, by contrast, assumes far more optimistic growth projections for Greece, namely achieving an annual 3.5% budget surplus (excluding interest payments) – nota bene, perpetually, on the basis of all that has been communicated so far. According to a spokesman for the European Stability Mechanism, there is “no reason for an alarmistic assessment of Greece’s debt situation”.

Interestingly, the point on which theIMF now appears to agree with European partners is that a law should be introduced triggering austerity measures if the country fails to achieve the above mentioned 3.5% surplus. Despite having repeatedly argued that a 3.5% budget surplus is unrealistic (vs. a more realistic 1.5% target), the IMF´s controversial “new” position now gives an insight to what seems to be a desperate attempt by European creditors to keep the IMF on board. Clearly there is no homogenous line among lenders (IMF, the European Commission and the ECB).

The IMF is unlikely to change its position on Greece´s debt sustainability and thus will likely avoid any financial commitment to current (and future) tranches of the Greek bailout package, if the situation does not change substantially. This in turn would trigger a debate in the German parliament – an idea dreaded by the mainstream parties in light of the upcoming general elections (September 2017). The same holds true for the Netherlands; bringing debt relief for Greece to the table during an election year (Dutch elections in March 2017) almost certainly will cost votes, so everything indicates another showdown towards the middle of the year.

None of the parties at the negotiating table want to take the blame for triggering the “Grexit” debate again, when the stakes are even higher than during the 2015 stand-off between the troika and Greece. The risk is that Greece may once again become the battleground for the existence of the entire EU.