The last thing Europe needs: another Greek debt crisis

Euro zone vs EU: what's the difference?

How is it 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, demanding higher yields on Greek debt.

Adding to the confusion is a warning from the International Monetary Fund that Greece’s debt is unsustainable and on an “explosive” trajectory, 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 looming in the Netherlands, France and Germany. Brexit negotiations will start in a few weeks.

Yet the threat of Greece leaving the euro demands attention. Here’s why the next few weeks will be decisive:

Hammer to fall

Greece is short of liquidity, but it must repay its creditors, including the European Central Bank. Large invoices fall due in July.

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

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

There is even disagreement over the extent of the problem Greece faces.

“The latest IMF review of Greece’s debt position was surprisingly pessimistic,” said Jeroen Dijsselbloem, the Dutch finance minister who chairs the meetings of senior euro area finance officials. “It’s surprising because Greece is already doing better than what this report describes.”

I want everything

The IMF, Greece and the German-led creditors 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 labor market reforms. The IMF did not join the third bailout in its first agreement in 2015 because it did not consider Greece’s debt as sustainable. He still maintains that Greece cannot be self-sufficient without major debt relief.

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

Greek Prime Minister Alexis Tsipras, meanwhile, shows no sign of giving in to demands for further reform. He insists that debt relief is needed before further concessions are made.

It’s a classic dead end and investors are watching to see which part flashes first.

To put out the fire

The next big step is a meeting of euro area finance ministers on February 20 – the last before the elections start to cloud Europe’s political waters. Giving even more financial aid to Greece will become even more difficult once voters start voting.

After that, the invoices will start to fall due. Greece faces a payment to the ECB of around 1.4 billion euros at the end of April and an additional 4.1 billion euros in July.

The stakes are high.

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

If European creditors refuse further 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: abandon the euro.

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

“Certainly there will be a Europe, if the eurozone survives, I think that’s really an issue on the agenda,” he said. “I think this time around I should say the odds are higher that Greece itself will pull out of the euro.”

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