Failure of Greece and the EU to reach compromise by 20 February ‘would bring back Grexit with a vengeance’

Greece’s embattled government has three weeks to break the deadlock in increasingly difficult talks with creditors or risk the country’s debt crisis resurfacing with renewed vigour.



Faced with the dilemma of agreeing to additional austerity or calling fresh elections, prime minister Alexis Tsipras was weighing his options at the weekend. Fears of further uncertainty in Europe’s weakest member state mounted as the International Monetary Fund (IMF) predicted that Greece’s debt load could become “explosive” by 2030.

“It is critical that a compromise is found,” said Aristides Hatzis, professor of law and economics at the university of Athens, noting that a slew of elections across Europe would only make Greece’s predicament worse.

“If these negotiations are not wrapped up by 20 February [when eurozone finance ministers next meet] we could be looking at potentially disastrous political turmoil, which would bring back the scenario of Grexit with a vengeance.”

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Central to the impasse is the enduring argument among lenders over Athens’ ability to achieve fiscal targets once its latest bailout programme expires in 2018. Without legislation of further pension cuts and tax increases, the IMF does not believe it can attain a primary budget surplus of 3.5%. At a meeting of eurozone finance ministers on Thursday, Athens found itself out in the cold with even the normally supportive European commission failing to rally to its defence.

Tsipras’ two-party coalition marked two years in office last week with the leftist leader declaring he was not prepared to take an “extra euro” in measures beyond those the country has committed to under its current €86bn (£73.3bn) bailout. Passage of some of the harshest cuts yet has seen the government’s popularity nosedive in polls. To ask for more measures when by dint of retrenchment Greece’s state revenues were better than expected was not only “extreme” but “absurd,” Tsipras’ office said.

The spat has delayed a second compliance review of reforms and economic progress that the government had hoped to complete by December. Conclusion of the review is vital to unlocking further loans from the bailout, the third since Athens revealed the extent of its financial woes in late 2009.

With €10.5bn in debt repayments lined up this summer, a rerun of the debt crisis looms if disbursements aren’t made.

Either way Greece’s economic future looks grim. In a devastating assessment that may well dominate the course of events, the IMF warned that even if reforms are religiously implemented — and agreed short–term debt relief imposed — Athens’ debt load is doomed to become “explosive”.

“Greece cannot grow out of its debt problem,” the Washington-based body wrote in a confidential report leaked to the media last week. “Greece requires substantial debt relief from its European partners to restore debt sustainability.”

The report, compiled by the IMF staff as part of ongoing discussion over whether the fund should participate in the country’s latest international bailout, is expected to ignite further debate when it is formally presented to the body’s executive board on 6 February. Short of debt re-profiling by EU member states, the board may decide the IMF cannot join the latest rescue progamme agreed with eurozone partners in 2015. If that happens, the European Central Bank would be unable to include Greek bonds in its bond buying programme, also seen as key to the country’s economic recovery as it would allow it to test its borrowing skills on international markets.

The prospect of fresh austerity — not least a reduction in the tax-free threshold and further pension cuts — comes at a time of worsening social conditions for many Greeks. For the first time since the debt crisis erupted, 53% of those asked in a recent Alco poll said they believed the euro was “wrong” for their country, with a third calling for the return of the drachma.

“The risks are quite considerable,” said George Pagoulatos professor of European politics and economy at the Athens University of economics and business.

“If there is no agreement by the end of February, Europe’s electoral calendar could kick in and freeze talks until May, by which time it will be too late.”

•The headline of this article was amended on 30 January to better reflect the content.