Europe drawn back to its first problem - Greece
The eurozone debt crisis was born in Greece. Nearly three years and two bailouts on, Europe must decide whether to give the country yet more help or cut it loose.
For all its complexities, Greece's problems essentially come down to three simple questions: Can the country return to growth? How big are its debts? And will the first ever be enough to pay off the second?
Put like that, one might wonder why policymakers have found a solution so elusive. But as ever, the devil is in the detail, and in Greece's case the details are devilishly difficult.
That is why ongoing efforts by the European Commission, the European Central Bank and the International Monetary Fund - together known as the 'troika' - to work out Greece's long-term growth and debt reduction prospects are so critical.
Everyone from German Chancellor Angela Merkel to ECB President Mario Draghi and Greek Prime Minister Antonis Samaras - who wants two more years to make the cuts demanded of him - is nervously awaiting the outcome of the troika's report, which is expected in late September or early October.
If it concludes that Greece is moving in the right direction, with the potential for growth and long-term debt-reduction slowly improving, everyone will breathe a sigh of relief, even if a multitude of obstacles remain.
If, as appears more likely given the noises emerging from EU officials, the troika finds Greece is not doing enough and has no realistic prospect of whittling away its debts in the coming decade, then a moment of truth may finally have dawned.
With plans afoot for the eurozone rescue funds and ECB to protect Spain and Italy by intervening to lower their borrowing costs, it would seem perverse to let Greece crash out of the currency area now, unleashing a wave of contagion that would take the crisis to new levels.
Instead, there is likely to be a scramble to find a way to give Greece more help which does not look like it is landing the bill with the German taxpayer, something the Bundestag would be likely to reject.
Samaras hinted at that equation after talks with Merkel last week. "We're not asking for more money. We're asking for breaths of air in this dive we are taking," he said.
In turn, Merkel underlined just how important the troika's findings will be.
"What Greece can expect from Germany is that we will not make premature judgments but will await reliable evidence, which for me means the troika report," she said.
MOUNTAIN TO CLIMB
While it is impossible to predict what the troika (dubbed by Greeks the Men in Black) will come up with when they return to Athens on September 5 for a second, more in-depth visit, their broad parameters are clear.
The critical assessment is whether Greece's debts as a proportion of gross domestic product can be brought below 120 per cent by 2020, from around 160 per cent now.
The IMF has identified 120 per cent as the upper limit for Greece's debt mountain, saying anything above that is unsustainable given the country's poor growth prospects and its need for huge and demanding structural economic changes.
But with GDP having contracted for the past four years and set to decline a further 7 per cent this year - substantially more than the 5 per cent originally expected - the country is climbing an ever-steeper hill towards solvency.
This offers a potential window since Greece's bailout terms, agreed earlier this year, left scope for re-evaluation if its recession proved deeper than expected. However, the German finance ministry said last week that clause was not legally binding.
At the same time, Athens' efforts to reduce the debt by slashing the budget deficit and carrying out a far-reaching privatisation programme have so far yielded scant results.
Deeper budget cuts that will save a further €11.5 billion (NZ$18b) in 2013 and 2014 are promised, but the question is whether they will be fully implemented - a hurdle that has routinely tripped up Athens in the past, leaving it short of targets.
CLIFF OR CORNER?
The assurances of Samaras, who until he took power was an opponent of austerity measures, that Greece will meet its obligations this time around are undermined by the facts.
Because of delays in implementing previous commitments, caused in large part by the holding of two elections over three months, Athens is substantially off-track in its €174b bailout programme, EU and Greek officials acknowledge.
They disagree over the amounts, but some estimates suggest Greece will have to come up with another €20-30b in cost-cutting and debt-reduction measures if the debt-to-GDP ratio is ever to be put back on a sustainable trajectory.
For the troika, a lot depends on the assumptions it makes. If the Greek economy does start to grow again in 2014, how much could it expand between then and 2020? If the privatisation programme does pick up pace, could as much as €50b really be raised by 2015/16, as originally envisaged?
Each of those variables could mean the difference between Greece eventually turning the corner or going over a cliff.
At the moment, EU officials say, the cliff is more visible than the corner.
As a result, over the coming weeks planning will intensify in Brussels, Berlin and beyond for what happens when the troika delivers its report. There are three broad potential scenarios:
- The troika says Greece is marginally off-track but is capable of coming up with further spending cuts and revenue boosting measures to get itself back on a sustainable path
- The troika says Greece is substantially off-track, needs to be given more time to meet its goals and possibly a third programme of EU/IMF support to return to long-term solvency
- Greece is way off-track, cannot meet its targets and needs another deep debt restructuring. That would mean the ECB and national eurozone central banks having to heavily write down the value of their Greek government bonds and another multi-billion programme of euro zone support.
While the first scenario is what policymakers are hoping for, two and three appear more likely and both raise the question of whether Greece, having already had two bailouts worth nearly €300b can remain in the eurozone.
Merkel and other EU leaders are adamant they want Greece to stay in. But German lawmakers have made clear they cannot countenance any more time or money for Greece and Merkel must keep their views firmly in mind with elections a year away.
If Greece's debts are assessed to be unsustainable, it is not clear that the IMF will be willing to take part in any further support for Athens. That would leave the eurozone alone to carry to can with limited bailout resources, while also fretting about Portugal, Ireland, Spain and Italy.
Logic might suggest Greece must go but this crisis has shown politics trumps maths and economics. That is why analysts say a "muddle through" is most likely to be found, for now at least.
"That's the lesson I've learned from the last three years. It's politics that's the dominant factor," said Janis Emmanouilidis, a senior analyst at the European Policy Centre, a Brussels think tank.
That could include meeting Samaras's call for two extra years, although German Finance Minister Wolfgang Schaeuble has rejected that, extending the maturities and/or cutting interest rates on its bailout loans, and getting the ECB and eurozone national central banks to take a write-down on the Greek bonds they hold, which they refused to under the second bailout.
The latter, though controversial, is being discussed, eurozone officials have told Reuters, and could be a win-win for the ECB. Not only would it keep the Greek show on the road but it would address investors' concerns that if the ECB buys bonds to ease pressure on Spain and Italy, other creditors get pushed down the pecking order.
Otherwise, the risk is that when the ECB piles in, private investors will head out, thereby neutering the central bank's efforts to bring down crippling borrowing costs.
None of that precludes the Greek economy subsiding further in a hopeless downward spiral, leading to it leave the eurozone later, when collateral damage would be more controllable - maybe after next autumn's German elections.
Emmanouilidis, who is of German and Greek origin, said while it was a cliche, EU leaders were likely to try to kick the can down the road again. "I don't think that road is very long," he said. "So if you kick the can again now, there's not a lot further it can go."