Will the Greek bailout prove to be a Trojan horse for the EU?

Alexis Tsipras, Greece’s Prime Minister, reached out to the International Monetary Fund (IMF) requesting additional assistance with managing the country’s debt. However, he advised that Greece was unwilling to agree to additional austerity measures. Germany and the Netherlands have advised that they are willing to assist the Mediterranean nation repay their existing loans. However, they have asked that the IMF also participate in order to reduce the exposure from a possible default. In return, the IMF has begun a review process to see if Greece has met the guidelines established as part of the country’s last bailout in 2012.

Will the Greek bailout prove to be a Trojan horse for the EU?

 

Can Greece Appease the IMF?

While the two sides reached an agreement over the weekend to manage Greece’s short term debt by setting aside 2 percent of its GDP, there is still a conflict over whether Athens can deliver enough growth to meet mid-term and long-term repayment targets. According to the IMF, Greece would need hit economic growth of 3.5 percent by 2018, and maintain it throughout the length of the outstanding loans in order to avoid another default. While there are several European countries on target to hit these marks, the IMF has noted that Greece is currently facing a period of political and economic stability, which makes financial predictions difficult.

Is the Stage Set for a Grexit?

Greece has periodically threatened to leave the EU if it is not given access to better loan terms. One of the conditions the European Central Bank (ECB) has placed on countries triggering an Article 50 exit is that any debts to the bank be resolved. Therefore it’s difficult to see that this is a likely outcome for the impoverished nation. But increased discussion of this possibility makes it more difficult for the EU and IMF to come to an arrangement to help Greece recover.

Can the EU Protect Greece From a Default?

Meanwhile the EU has tacitly agreed to act as guarantors for Greece. Still, with a number of elections on the horizon, the IMF is understandably wary of promises from administrations which may soon find themselves out of power. The Netherlands and France are both seeing the rise of isolationist politicians who would prefer to keep funds within their own borders, rather than sent to Athens for a fourth debt relief program. Especially in the wake of the U.K.’s upcoming exit from the EU, and President Trump’s bearish outlook on international assistance for European states, it is unlikely that the IMF will proceed without a serious assessment of Greece’s willingness to repay their current and future debts.

Italy Is Next in Line For Economic Woes

Greece is not the only country facing an economic crisis. Italy currently has a 12 percent unemployment rate. This is one of the highest in the EU, and Italy’s worst performance since 2015. Despite a global reprieve from the crushing recession that began in 2008, Italy has struggled to expand its economy. The country currently has a debt load that exceeds its GDP by 130 percent. This is worse than any other EU country, with the exception of Greece, which has a debt to GDP ratio of 183 percent.

The last Italian government chose to use high taxes as a method of financing repayment. This backfired and reduced private investment. Eventually, the Prime Minister quit following the failure of a referendum aimed at streamlining the Italian parliament. The new party now seeks to replace the euro with a national currency. It has also advised that it may default on its international loan obligations unless given a better deal through renegotiations.

This has led to a war of words between Italian politician Beppe Grillio and ECB President Mario Draghi. Last week, Draghi warned both the Italians and the French that the euro and EU membership are a package deal. Renouncing one means letting go of both. The ECB also refuses to help Italy by taking over its bad bank debt. This accounts for 25 percent of the nonperforming loans held by EU member states.

How a Greek Default Affects Trading

Greece continues its headlong plunge into debt. Eventually the EU and/or the IMF will need to come to the rescue. The longer the situation continues, the more expensive the bailout will be. The euro will take a hit if the IMF does not agree to participate in debt restructuring. This appaears to be unlikely before the next meeting of Europe’s leadership on February 20th. The pound should see a rise, since the U.K. will no longer bail out its more reckless neighbors. Finally, gold will get a bump thanks to the uncertainty of the current situation in Europe.