Greece’s political changes put bailout, euro at risk

The Greek government is missing key deadlines for making economic reforms that were promised in return for its international bailout, knocking the program off schedule just weeks after it was agreed to and increasing the chances that the country will have to abandon the euro.

A contentious spring election campaign and the divided results of the May 6 vote have left the country with a caretaker government that has no power to take major steps. The measures pledged by Greece, which include cuts to welfare programs and public-sector wages, tax reforms and the drafting of long-term budgets, were due to be completed in May and June.

Gallery

Leaders shaping global economic policy: From cabinet officials to central bankers, these leaders are making critical policy decisions that could shape the future path of the global economy.

More World News

European financial crisis has ripple effect on U.S. firms

Ariana Eunjung Cha

The eerie emptiness at a Madrid Apple store is an indicator of the growing severity of the impact of Europe’s crisis on U.S. companies.

Draghi: Central bank poised to help save euro

Ariana Eunjung Cha

Bank head Draghi said institution ready to intervene, but analysts took the lack of immediate action to indicate a standoff between Germany and other ECB countries.

IMF’s Lagarde: Euro crisis, U.S. fiscal cliff require ‘crisis management’

Brad Plumer

Europe, she stressed, isn’t the only weak spot in the global economy.

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.