As Greek financial resources are emptied both sides in the Greek financial standoff remain far apart on a strategy to resolve Greece’s fiscal woes. There have been only a minimal flow of resources into the country in the shape of the European Central Bank’s emergency liquidity assistance, which Greece’s tottering banks rely on for survival. The Greek Civil Service risks running out of money to pay State Employees as the June deadline for the latest Greek debt repayments approaches.
With the Greek economy back in Recession following a First Quarterly drop in Economic activity of 0.2% and the next IMF repayment of $333 million due on the 15th. June another debt crisis approaches.Greece and its lenders will likely reach a temporary deal — meaning that in the coming days or weeks Greece will probably receive funds in exchange for the introduction of mutually acceptable reforms. A Grexit will be avoided in the immediate term, but pressure on Athens to introduce reforms will continue, which means that the Greek crisis is far from over and the continuity of the Greek government remains in doubt.
At this stage it is expected that yet another temporary agreement will be brokered to avoid a fiscal default and the beginning of ‘Grexit’ The threat by the Syriza Party to call for new elections only stalls the inevitable crisis for a month or two.
Considering Greece’s significant debt repayments in July and August — some 7 billion euros in total — Athens needs money well beyond the end of its bailout program. Any new funds have to be ratified by eurozone governments, which will be controversial in countries such as Germany and Finland. More important, new financial aid for Greece will be linked to additional reforms, which will prove explosive for Syriza. As a result, early Greek elections are still a possibility, even if an agreement between Athens and its lenders occurs.
Rumours of an agreement between the EU and Greece that would allocate $7 billion to Greece to pay down its historic debt before the August deadline as well as a further 11 billion Euro to re capitalise Greek banks, will just ‘kick the can further down the road’ and not solve Greek insolvency. It can be only a matter of time before the left wing Syriza calls yet another election. The stage has been set for a Grexit from Europe and the subsequent fiscal earthquake.
Europe has effectively internalised a possible Greek exit already and the thinking now is how to limit the fallout amongst the larger Mediterranean economies that face similar debt mountains. Europe may be able to weather a Grexit but an Italian or Spanish departure must surely spell the end of the European dream.