With fresh IMF warnings over Greece’s “unsustainable” debt, is the Eurozone crisis about to heat up again?
Jennifer McKeown, chief European economist at Capital Economics, says Yes.
The IMF’s renewed assertion that Greek public debt is unsustainable is little more than a statement of the obvious. But it suggests that the Fund will not contribute to the bailout as had been hoped, implying that Eurozone creditors will need to foot the bill alone. This will require parliamentary approval, which will be particularly difficult to achieve ahead of elections in Germany and the Netherlands.
So the bailout is at risk of collapse again. Without financial support, Greece will be unable to make the large debt repayments due this summer and its membership of the currency union could cease. Admittedly, financial markets now seem to see Greece as a special case and European Central Bank bond purchases might be used to stem contagion to the other peripheral economies. But with eurosceptic parties gaining support elsewhere, it would be unwise to assume that a Grexit could be so well-contained.
The biggest risk to the Eurozone’s broader survival could come in a few years’ time if Greece started to perform well outside the single currency.
Carsten Hesse, emerging European equity strategist at Berenberg, says No.
Despite negative news from its creditors recently, Greece is on the right track.
Following years of painful, albeit necessary, austerity measures, it achieved a primary surplus of 2.3 per cent of GDP in 2016, far above the 0.5 per cent target agreed with the lenders. Its economy expanded 1.6 per cent year-on-year in the third quarter of 2016, its fastest rate since 2008. Leading indicators such as the Greek economic sentiment index signal healthy momentum.
Providing Greece can avoid a messy confrontation with its creditors and focuses on pro-growth reform, there is no reason why it cannot join the now fast-recovering erstwhile reformers in other parts of the Eurozone periphery.
And even if Greece did default on its debt payments, European institutions have enough firepower via the European Stability Mechanism and the European Central Bank’s Outright Monetary Transactions to prevent contagion risks. As long as the political will is there to keep Europe together, a Greek crisis will not become a European tragedy.