Editor's Note: Greece is a country in crisis. Facing financial, political and social uncertainty, Greece's ruling Syriza party has been trying to cut a deal with the European Union to keep the Greek economy afloat. But European institutions and prominent member countries such as Germany are reaching the limits of their patience when it comes to tolerating Greek debt. Something has to give, and Athens is in an extremely vulnerable position. Stratfor is logging the latest developments in this crisis update.
May 28
Although the Greek crisis is not officially on the current G-7 summit agenda, the Mediterranean nation's uncertain future is at the center of the debate among the world's largest economies. What was originally a technical dispute about Greece's financial situation is evolving into a discussion about the geopolitical implications of a Greek exit from the eurozone and potentially the European Union.
In recent hours, the U.S. delegation to the G-7 meeting has voiced its political and security concerns about a possible Grexit. From Washington's point of view, a desperate government in Athens could turn to Russia for financial help, which would undoubtedly come with obligations. In addition, the United States is concerned that economic collapse in Greece could lead to social and political chaos in which extremist groups, both local and foreign, could flourish. These concerns are not unique to the United States: German officials have made similar statements. Berlin wants to teach Athens a lesson, but it is also worried a Grexit would threaten the survival of the eurozone.
The concerns of world powers are not unfounded. Greece has a strategic interest in maintaining good relations with Russia, because of its dependency on Russian energy, potential Russian investment, and Greece's participation in infrastructure projects such as the Moscow-sponsored Turkish Stream pipeline. Greece also is no stranger to extremist and violent movements. More important, Greece is strategically positioned in the eastern Mediterranean, a region already in flux.
However, despite concerns, Athens and its lenders are far from a deal. In recent hours, several Greek officials suggested an agreement would be reached this week, but officials from the European Commission and the German government were considerably more cautious. On May 28, Vitor Constancio, vice president of the European Central Bank, suggested that a Greek default with the International Monetary Fund would not necessarily force the European Central Bank to stop providing liquidity to Greek banks. This is a notable statement because Greek banks depend on emergency liquidity from the Frankfurt-based institution to stay afloat.
Greece and the eurogroup still have a few days to reach an agreement. Athens has to make its next payment to the International Monetary Fund on June 5. Greece probably has the resources to make the payment, but it is running out of time. Stratfor estimates that Greece will not be able to make its big repayments to the European Central Bank in July and August without external assistance — a reality that will force Greece and the eurogroup to reach a temporary deal.
May 20
After a routine meeting, the European Central Bank said May 20 that it would once again raise the upper limits on Greece's emergency liquidity assistance, the lifeline for the country's banks. Speculation was rife ahead of the meeting that the ECB's Governing Council might vote to increase pressure on Greece to reach a deal by raising the collateral its banks need to gain access to the liquidity. The alternative was to cut off emergency assistance altogether, which would have been a drastic measure. Contrary to the negative forecast, however, the ECB took positive action, as has been the case since the bailout extension deal was struck on Feb. 20.
In a show of confidence, Greek Finance Minister Yanis Varoufakis said during a Greek television interview May 18 that he expected a deal within a week. German Chancellor Angela Merkel and French President Francoise Hollande joined together the following day to urge for a deal before May 31.
Such optimism is probably misplaced. Indications from technocrats taking part in the negotiations suggest that a substantial gap remains between Greece and Brussels when it comes to agreeing on pension and labor reforms. These have been the main stumbling blocks throughout the talks and a lack of progress there bodes ill for the chances of a swift conclusion overall. The other landmark looming on the horizon is the next debt repayment to the International Monetary Fund, which is due June 5. However, since this is 300 million euros (about $333 million) — a small amount compared to previous payments — it is unlikely to instill the urgency required for the two sides to reach a lasting agreement at this stage.
May 13
The European Union reported May 13 that Greece had fallen back into recession after the Greek economy contracted by 0.2 percent in the first quarter. But there was good news for Greece too. The same day, the European Central Bank decided to raise the limit on emergency liquidity funds to Greek banks by 1.1 billion euros ($1.24 billion) to 80 billion euros. More important, the bank decided to leave intact the collateral it accepts from banks in exchange for liquidity. Both of these measures are meant to keep Greek banks afloat.
In the meantime, the Greek government is engaged in intense debate over the country's future. On May 12, Prime Minister Alexis Tsipras held a five-hour Cabinet meeting that will be followed by a second meeting May 13. After the May 12 meeting, several Greek officials suggested that neither early elections nor a referendum on Greece's negotiations with its lenders was on the table. They also said that Athens and its lenders would reach an "honorable agreement" by the end of May. Tsipras will meet German Chancellor Angela Merkel during the European Union's Eastern Partnership Summit from May 21-22, and Greek officials hope that Athens and Berlin will reach a political agreement then.
Greece will likely complete its bailout program by the end of June, but it is still possible that the country will hold a referendum. Starting in July, Greece will be on its own: It will have no bailout package, limited access to financial markets and no liquidity support from the European Central Bank. This will force Athens to make a choice between asking the European Union for additional money and defaulting on its debt. The ruling Syriza party will probably not make a decision without asking voters first, so a vote on the future of the country could take place at some point during the second half of the year.
May 11
The Greek saga played on through another eventful day. Greece and its lenders continued negotiations over the country's bailout program, and Athens announced it would make a debt payment to the International Monetary Fund. These events will temporarily delay a major crisis but confirm that both parties are still far from a permanent agreement.
Following a summit that focused on Greece, the Eurogroup issued a statement welcoming progress in the negotiations between Athens and its lenders. The statement was markedly different in tone from those made after previous summits, but Greece was still unable to secure funds from the meeting. In fact, the Eurogroup acknowledged that more time and effort is needed to address outstanding points of contention. The Eurogroup is still pressuring Athens to reform labor legislation and the pension system and to continue privatizing state-owned companies — measures that many in Athens resist.
While the meeting was taking place in Brussels, Greek officials announced that they would transfer 750 million euros (roughly $837 million) to the International Monetary Fund to pay a debt due May 12. The move is significant because, after this payment, Athens does not have any IMF debt maturities for almost a month — the next one is due June 4. The decision confirms Stratfor's forecast and temporarily reduces the risk of a Greek default. However, Athens is still calling for a special Eurogroup summit before the end of May to secure funds to pay salaries and pensions.
Stratfor believes that Athens and its lenders will reach a temporary agreement between late May and early June, releasing the final tranche of Greece's bailout. However, any decision will not mark the end of the Greek crisis. Greece's second bailout expires in late June, but, because Athens must repay the European Central Bank 3.4 billion euros in July, both parties will have to return to the negotiation table to discuss a new agreement.
May 6
Greece paid the International Monetary Fund 200 million euros ($224 million) in interest May 6, once again avoiding a default. Athens was expected to make the payment but could have a harder time making a 750 million euro payment that is due May 12. However, Greek Alternate Minister of Finances Dimitris Mardas said that the May 12 payment would be made, even if Athens had to dip into the pension system.
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