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reflections

Apr 16, 2015 | 20:16 GMT

Greece and Its Lenders are Running Out of Time

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

Greece and its creditors have roughly four weeks to decide whether Athens will remain in the eurozone. Since winning Greece's Jan. 25 elections, the Coalition of the Radical Left, or Syriza party, has been negotiating with the Eurogroup and the International Monetary Fund over the measures the Greek government should introduce to receive additional bailout funds needed to prevent a default and keep the Mediterranean nation within the currency union. The negotiations are deadlocked because of a fundamental problem: Greece's lenders want it to cut spending and boost revenues, but Syriza promised voters it would actually spend more to resurrect the country's moribund economy. Athens will not introduce the full list of measures the European Union and the IMF are demanding. Thus, the decision over Greece's future will ultimately be political.

Prime Minister Alexis Tsipras has to make promises to Greece's lenders while keeping dissent within Syriza at a tolerable level and avoiding any measures that would spark social unrest. This explains why most of Greece's proposals to the eurozone and the IMF over the past two months revolve around the issue of improving tax collection but do not include any concrete plans for reforms in areas such as labor legislation or the Greek pension system. To expect Greece to change its position on these issues is unrealistic — not because of Athens' ideological stubbornness, but because of Tsipras' countless domestic constraints.

So far, Greek voters have been relatively quiet. Athens has seen some protests in the past few weeks by students, anarchist groups and mine workers, among others, but nothing out of the ordinary for a country in such a deep economic crisis. Most pensions are being paid, as are public-sector wages. Notably, the Greek government is also paying its debt to the IMF. To do so, Athens has been collecting money from every possible source, including pension funds, regional funds and the financial reserves of various ministries. The government has also delayed payments to companies that supply goods and services to the public sector.

But this strategy is not sustainable. By making its last repayment to the IMF in mid-April, Athens delayed a potential default for a few weeks, at least until the next maturity on May 12. But this delay also gives the Eurogroup time to continue pressuring Greece to make greater concessions in the negotiations over bailout funds. The irony of paying a debt is that it temporarily reduces the debtor's leverage to threaten default. Thus, the German government and several EU officials have said an agreement allowing for new rescue funds will not be reached with Greece during the upcoming Eurogroup meeting on April 24. The next moment of truth for the Greek crisis will come when the eurozone economy ministers meet May 11.

Four weeks is a long time. At the end of April, Athens will have to pay some 1.7 billion euros (roughly $1.8 billion) in pensions and salaries, although whether Greece has the money to do so is not clear. The Greek public is used to delays in these payments, but six years into the crisis, the room for Athens to keep social unrest under control has shrunk significantly. Tsipras has said that if he were forced to decide between paying salaries or paying debt, he would choose the former. On April 16, Greek Finance Minister Yanis Varoufakis denied reports that Athens asked the IMF for more time to pay back its debt.

Greece still has a few moves it could make to buy more time, including introducing some kind of parallel currency to pay public salaries and pensions. While this measure would free up some money for debt repayment, it would not solve Greece's problems permanently. It would also mark a turning point for the eurozone because two currencies would be circulating within the monetary union. More important, it would be a giant step toward the so-called "Grexit," since a parallel currency would begin ushering in a return to the drachma.

Stratfor expects Athens and its lenders to reach a deal on the next round of funding at some point in May, but an agreement would buy both parties only a few extra weeks. After May comes June, when Greece will face a new round of massive debt repayments. And after June comes the end of Greece's current bailout and the beginning of negotiations over a new financial program, creating even greater pressure on Syriza.

The latest rumor in Athens is that Tsipras is planning to hold early elections to get rid of the most radical elements of his administration before forming a more cohesive government that is better equipped to negotiate a package of reforms with Brussels. Greek officials have also suggested that the government could hold a referendum on whether it should pay its debt. Though both ideas at this point remain mere speculation, these scenarios cannot be ruled out. Syriza was elected to keep Greece in the eurozone and to end austerity measures. The party will not be able to achieve both promises simultaneously, so an early vote could allow it to refine its popular mandate.

It is not a given that a new mandate would include remaining in the eurozone. Most Greeks still want their country to stay in the currency bloc because they hope reaching a mutually favorable deal with the European Union is possible. But the longer a lasting solution to Greece's woes is postponed, the more the policy options narrow. It is unclear whether Greek public support for the euro will continue at current levels if Athens and the Eurogroup remain focused primarily on buying time.

Germany, which holds the most sway over Greece's fate out of the eurozone members, is also dealing with internal dilemmas. It needs to protect its national wealth and reassure voters that their money will not be squandered bailing out an uncooperative government. It also needs to preserve the integrity of the eurozone. A big part of Syriza's strategy counts on Berlin's second imperative to be stronger than the first. The Germans are also probably convinced Greece's fiscal crisis is not as urgent as it seems and that the country can survive a few extra weeks without new rescue funds. But like Athens' strategy, Berlin's position is not sustainable.

Athens is unlikely to change its negotiating position in a significant way between now and May 11, primarily because it has little room to back down. Within the next four weeks, the Germans will have to decide whether they want to reach an agreement with Greece or to see the Mediterranean nation leave the eurozone. Stratfor thinks the former is more likely, but both players are running out of time for a deal. Athens is not at the breaking point yet, but the Greek saga has entered a stage in which the technical negotiations are irrelevant and a political decision has to be made.

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