New elections are scheduled for June 17. But there is no guarantee that they will produce a government willing and able to carry out the steps pledged in return for $170 billion in emergency loans from other European countries and the International Monetary Fund.
The Obama administration is closely watching the situation, worried that a breakdown in Greece’s reform program and its exit from the euro currency union could touch off a wave of financial trouble across Europe and possibly the world. The fear is that if Greece cannot meet its commitments, investors will lose confidence in other struggling countries, such as Spain and Italy, forcing them to seek massive bailouts that would be difficult for Europe and the IMF to afford.
Bloomberg News reported that President Obama spoke by videoconference Wednesday with German Chancellor Angela Merkel, French President Francois Hollande and Italian Prime Minister Mario Monti about the state of Europe’s debt crisis.
Change in leadership
In recent weeks, the prospect of Greece’s exit from the euro has moved from the fringe of discussions to a threat that officials at the IMF, the European Central Bank and elsewhere now consider tangible. In its most recent analyses of the country, the IMF has begun quantifying the cost and fallout of Greece dropping the euro.
The success of the far-left Syriza party in the May elections has heightened the risks. Syriza’s leaders have pledged to renege on the bailout agreement, which they consider too draconian. Analysts consider a possible Syriza victory on June 17 as the most likely precursor to a euro exit.
Leaders of the Socialist PASOK party and the right-leaning New Democrats — the mainstays of Greece’s modern political system — jointly negotiated the bailout plan with Europe and the IMF, but they were forced to leave power after the May vote.
Even if those parties return to power in the coming election, the delay in making good on promised changes poses its own set of problems. The IMF made clear in approving the bailout program that there was little margin for delay. Greece’s most recent bailout — the second it has received — was controversial at the agency and within Europe. If the reform program falls too far off track, there is no guarantee the money will keep flowing.
“You have to believe that patience is wearing a little thin,” said Larry Kantor, head of research for Barclays Capital and one of many analysts who say the risk of a Greek euro exit is rising.