The last thing Europe needs: another Greek debt crisis

What is déjà vu? Another debt crisis is brewing in Europe.

Greece needs European creditors to release cash from the bailout agreed in 2015 so it can repay its debt, but officials disagree. Investors are starting to worry and are demanding higher yields 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 could hardly be worse. European leaders have a lot to do. Elections are approaching in the Netherlands, France and Germany. Brexit negotiations will begin in a few weeks.

However, the threat of Greece leaving the eurozone deserves attention. Here’s why the next few weeks will be crucial:

hammer to fall

Greece is short of cash, but it must repay its creditors, including the European Central Bank. Major bills are due in July.

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

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

There are even disagreements about the scale of the problem facing Greece.

“The IMF’s latest assessment of the Greek debt situation was surprisingly pessimistic,” said Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of the euro zone’s top financial officials. “It’s surprising because Greece is already doing better than what you describe.”

I want all

The IMF, Greece and the creditors, led by Germany, all have very different priorities. Here’s what everyone wants:

The IMF has called on Greece to make more ambitious changes to its economy, including reforming its labor market. The IMF did not sign on to the third bailout when it was first accepted in 2015 because it did not consider Greece’s debt sustainable. He continues to maintain that Greece cannot be self-reliant without major debt relief.

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

Greek Prime Minister Alexis Tsipras, meanwhile, shows no signs of giving in to demands for further reforms. He insists debt relief is needed before making further concessions.

This is a classic showdown and investors are watching the situation to see which party blinks first.

To put out the fire

The next major step will be the meeting of euro zone finance ministers on February 20, the last before elections begin to muddy Europe’s political cards. It will become even more difficult to accept even greater financial aid for Greece once voters start voting.

After that, the bills will start arriving. Greece will have to pay the ECB around 1.4 billion euros at the end of April and another 4.1 billion euros in July.

The stakes are high.

Greece’s unemployment rate is expected to exceed 21% in 2017. Investment is down more than 60% and output has contracted by more than 25% since the financial crisis. The social fabric of the country is fraying.

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

This will leave only one option: abandon the euro.

Ted Malloch, President Trump’s expected choice for US ambassador to the EU, told Greek television on Tuesday that the future of the euro zone would be decided within the next 18 months.

“There will certainly be a Europe. Whether the eurozone will survive, I think is a question on the agenda,” he said. “I think this time I have to say that the chances are higher that Greece itself will leave the eurozone.”

CNNMoney (London) First published February 8, 2017: 12:27 p.m. ET