Greece: The crisis that never went away

A summer showdown is on the horizon...

Greece: The crisis that never went away

Markus Schreiber / AP

Tensions have been on the rise for months between Greece and its international creditors, the country has received €21.4bn of the €86bn bailout. In order to receive its next tranche of funding the country must pass a review to satisfy its creditors that it following through on the reforms that it has agreed to.

A disagreement has formed between two of these creditors, the European Commission and the International Monetary Fund (IMF).

What's the problem?

The agreement that was eventually signed requires the Greek Government to achieve a budget surplus of 3.5% by 2018 - this was one of the most contentious parts of the agreement as Greek officials argued that it would not be able to achieve this target without causing further damage to the country's economy.

The Commission believes that the country is on-track to achieve this goal. Doing so would require further savings to the value of 3% of the country's GDP.

These savings are slated to be delivered through pension reforms, income tax reform, public sector wage cuts and VAT changes.

However, the IMF does not agree with these figures, it believes that the savings target to meet the 2018 requirements should be 4.5% for this year.

Provisions

The EU is optimistic that the Greek economy is turning the corner, its latest forecast for the Greek economy expects it to contract by 0.3% - this is an improvement on a predicted 1.3% decline just six months previously.

The creditors have compromised and asked Greece to prepare a contingency plan to add additional savings worth 2% of its GDP if the country's finances stall.

Discussing these additional measures, president of the Eurogroup Jeroen Dijsselbloem said that these plans need to be, "credible, legislated up-front, automatic and based on objective factors."

However, the country's Finance Minister Euclid Tsakalotos says that the drafting of these measures will be complicated as the drawing up of such provisions is not permitted by Greek laws.

Mr Dijsselbloem insisted that they will find a way, "Of course if there are legal constraints we can't and won't break legal constraints. We will design it in a way that delivers credibility ...and (is) legally possible," he told a press conference in April.

Loose talk

In April Christine Lagarde, head of the IMF was forced to respond to Greek politicians who claimed that the Washington-based institution is trying to push the country towards a default.

Officials in Athens responded angrily after Wikileaks published a transcript from what it says is a mid-March teleconference between three senior IMF officials in which ways to pressure Greece into a default are discussed.

The conversation is said to feature the IMF's Europe department head Poul Thomsen and Delia Velculescu, leader of the IMF team in Greece - it reflects on the inaction over Greece's financial problems until the country faces an 'emergency' situation.

"What is going to bring it all to a decision point?" Mr Thomsen is reported to have asked, before continuing, "In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default."

Ms Velculescu later agrees, "we need an event, but I don't know what that will be."

"Any speculation that IMF staff would consider using a credit event as a negotiating tactic is simply nonsense," Ms Lagarde wrote in a letter to Greek PM Alexis Tsipras.

Bottom line

The Greeks have argued that they cannot move forward while being weighed down by their debts, and the that they require some level of debt relief to move forward.

But reducing the debt level is both a politically and economically sensitive proposition - there are also clauses in the Lisbon Treaty which could make it impossible for the EU to write off debt.

Ms Lagarde has suggested that the IMF could reduce interest rates on Greece's debt, and give the country a longer period to pay off its loans.

Greece faces a series of major debt repayments coming over the summer months - the largest being a €2.3bn transfer to the European Central Bank in July.

Failure to secure fresh funding before these payments could mean a new internal crisis in Greece while would be likely to result in a delay in paying public sector wages and pensions.

This could also put fresh pressure on the country's fragile coalition government, which only has a majority of three in the 300 seat parliament in Athens. Opposition party New Democracy lead in the latest opinion polls