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Published February 10, 2017
Nothing is inevitable in financial markets — except perhaps the return of Greece as a source of concern.
More than seven years since Greece's sky-high debts first unnerved investors and stoked speculation of the end of the euro currency, the country is back in the spotlight for the same reasons.
Greece's government borrowing rates have spiked higher, a sign investors are worried again about a potential default and Greece's exit from the euro — so-called Grexit.
The renewed Grexit talk comes even after three international bailouts, an economic depression, and countless changes in government in Athens.
Greece last rattled markets in 2015. This time, the worry is two-fold: Whether European governments will maintain their commitment to finance Greece in the face of rising anti-EU sentiment, and whether the International Monetary Fund will contribute to the latest bailout program.
Greece's debt problem has already become an issue in early campaigning for key European elections this year.
Wolfango Piccoli, analyst at Teneo Intelligence, notes that creditor Germany seems to be taking a tough stance.
The latest comments from German Finance Minister Wolfgang Schaeuble show that he "seems convinced that attack is the best form of defense," said Piccoli. Germany is Greece's biggest rescue creditor and, as it has done for years, is demanding tough budget savings targets for Greece.
"Schaeuble is signaling to all sides that he is not afraid of letting the matter drag into the German election campaign," said Piccoli.
For Greece, time is running out, as it faces a spike in debt repayments worth 7 billion euros ($7.5 billion) in July.
But finding a compromise among all three interested parties — Greece, the IMF and the eurozone — looks tricky.
At heart, the disagreements center on whether to cancel some of Greece's debt and how tough its budget targets should be.
This week, the IMF concluded in a report that "further relief may well be required to restore debt sustainability."
It's been repeating that message for two years and is the main reason why it has not yet committed financially to Greece's latest bailout, worth 86 billion euros ($91 billion), agreed on in July 2015.
The deal envisaged the IMF joining eventually, but that seems increasingly unlikely as European creditors remain opposed to the IMF's proposal of offering Greece substantial debt relief, including longer repayment and grace periods as well as lower interest rates.
That's worrying investors as it would mean that the July 2015 bailout would have to be renegotiated, introducing another layer of uncertainty and causing more trouble for the Greek economy.
Germany and the European creditors insist Greece's debts can be made sustainable if the country sticks to the austerity-and-reform medicine that it's been prescribed over the past seven years. As part of the July 2015 bailout, Greece committed to reaching a primary budget surplus — that is, excluding the cost of financing debt — of 3.5 percent of GDP through spending cuts and tax increases.
But many independent economists — including the IMF — say that the budget target is unrealistic, at least in the long-term, and would require a "Herculean effort."
Austerity has already taken a huge toll on Greece, which has lost a quarter of its output and seen hundreds of thousands sink into poverty. The IMF forecasts Greece's debt will, as things stand, swell to a staggering 275 percent by 2060 from around 180 percent now.
Most of the IMF's board thinks a 1.5 percent surplus target is more realistic and that now is the time to offer Greece sizeable debt relief. The problem is that the financing gap resulting from the lower surplus target would have to be filled by new loans if the European creditors oppose debt relief — Germany would face the biggest single bill, an unappetizing prospect in an election year.
Eurozone representatives, including Jeroen Dijsselbloem, its top official, say the IMF is being overly pessimistic and hasn't taken account of generous bailout lending rates and the huge strides taken by Greece that have seen the country turn in a primary budget surplus.
Efforts are underway to find a compromise and the hope is that something can emerge at a meeting of eurozone finance ministers, due in Brussels on Feb. 20.
In the Greek parliament Friday, left-wing Prime Minister Alexis Tsipras described the creditors' demands for more austerity as "the theater of the absurd" but insisted a compromise was possible thanks to Athens' better than-expected budget performance.
The uncertainty around Greece's bailout has stoked talk of another election, which would be its third in little more than two years.
"The risk of early elections is increasing given the rising political cost to the government and its slim majority in parliament," said Kathrin Muehlbronner, senior vice president at ratings agency Moody's. The agency says the impasse between the IMF and the eurozone is "credit-negative" for Greece, raising the possibility of a number of outcomes, including a Greek debt default.
Besides the uncertainty created by the European elections, the intentions of the Donald Trump administration in the United States — the biggest contributor to the IMF — also remain unclear.
Trump openly supported Brexit, and his advisers have been openly skeptical about the euro's long term prospects of survival. It's a sentiment that has brought back a word dreaded in Athens: Grexit.
"The timing of this latest round of the Greek tragedy," says Michael Every, a senior analyst at Rabobank International, "couldn't be much worse."
Pylas contributed from London.
Follow Pylas at https://twitter.com/panpylas and Gatopoulos at https://twitter.com/dgatopoulos