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.
Little margin for error
An IMF review of Greece’s progress was due to be underway by Thursday, but it has been put off until the country resolves its political standoff.
A modest delay probably wouldn’t derail the current Greek bailout or impede the flow of loan funds needed to keep the country afloat while it tries to engineer an economic rebound. In approving the new bailout, other euro-zone nations made virtually open-ended pledges to support Greece as it makes what could be a decade-long climb back to economic health.
But the IMF’s analysis of Greece’s debts and economy also shows little margin for error. Under the best of circumstances, the country’s government debt will remain among the world’s highest. Even slight “misses” in meeting growth or spending targets could send the debt spiraling out of control.
“Political resolve and bold front-loaded reform implementation are absolutely critical,” the IMF program states, noting that a default or euro exit become more likely “in the event that policy implementation takes longer or falls short.”
The failure of Greek politicians to abide by promises made under the country’s first bailout, in 2010, meant that effort quickly fell behind.
Many of those same economic changes were again included as conditions of the new, four-year bailout that the IMF and the other euro-zone countries crafted for Greece this year. The changes were supposed to be put in place in coming weeks.
The bailout program, for example, requires the government to take a series of politically tough steps so wages and prices throughout the country begin to fall in tandem. Price deflation would ease the effect of lower wages on households while making the Greek economy overall more competitive with those of other euro-zone nations. This could help Greece revive exports and local manufacturing.
Disruption was considered
By the end of June, major changes were to be made to Greece’s collective-bargaining law. Salaries were to be cut for highly paid civil servants. And the country’s social and welfare benefits were to be revised so that more went to the poor and less to families with above-average incomes.
Those and other steps were outlined in a 230-page IMF document that included a memorandum of understanding with the Greek government detailing the specific steps and timetable.
The possibility that local politics could disrupt the program was mentioned in the document. But IMF officials took heart in the fact that the PASOK and New Democracy parties had both endorsed the program, providing “further confidence in policy continuity during the program period.”
What wasn’t foreseen was the current deadlock and the rise of Syriza, which finished second in the May 6 vote. According to some polls, the party is on track to do even better in the next election.