Greek Debt Drama: It Ain’t Over Yet!

Just when it seemed that the Greek debt drama was in for a happy ending with a third bailout in the works, the IMF said that this ain’t a done deal just yet. No wonder the euro has been selling off against its forex peers once again!

Wait, wait, wait. I thought they all shook on it already?

Everyone and his momma had been cheering for Greece, as the country has been able to pay some of its recent debt obligations to the ECB and IMF, thanks to emergency bridge funding from the central bank. These funds were unlocked after the parliament made progress when it comes to setting the stage for further austerity measures required to secure more bailout funds.

greece imfHowever, the IMF isn’t so sure if this will be good enough. According to the summary of their meeting earlier this week, officials “cannot reach staff level agreement at this stage” and that they will participate in negotiations to ensure that the bailout is “consistent with what the fund has in mind.”  As it turns out, IMF head Christine Lagarde has previously mentioned that they won’t be doling out more cash to the debt-ridden nation without any form of debt relief.

What in the world is debt relief?

Debt relief is just another term for a write-off, which can either be a partial or total forgiveness of debt. What the IMF wants is to have some of Greece’s creditors *cough, Germany, cough* wave their magic wand and make some of the loan obligations disappear. Nein!

So, after months of putting the pressure on Greece, the ball is in the creditors’ court now. Understandably, Finance Minister Wolfgang Schäuble and the rest of the German officials aren’t pleased about all this since they’ve been bending over backwards to help Greece out for the past few years and now they’re being put in an awkward position.

Greece’s creditors have been strongly opposed to debt relief, insisting that a write-off would be considered only if the Greek government is able to significantly raise taxes, reduce pensions, and sell some of its assets to the private sector. Even harsher austerity measures, you say? Oxi!

Great. Now what?

With the IMF no longer on board with the current bailout plan, other creditors are also thinking of backing out, too. After all, other European governments would be forced to shell out more funds to make up for the IMF’s share in the 86 billion EUR bailout package, and that’s just not happening.

Other forms of debt relief, such as longer repayment terms or grace periods, could still be on the table but this would require approval from European parliaments, including the tough guys over at Germany’s Bundestag. Keep in mind that these guys had been very reluctant to agree to the current bailout plan without any debt relief so it’s hard to imagine that they’d give in to one that requires a write-off.

So what are Greek officials doing about this?

The Greek government has already caved to the creditors’ demands of harsher austerity measures, sparking outrage among Greek citizens who’ve voted against austerity in the nationwide referendum. Even some members of his own Syriza political party have turned against Prime Minister Tsipras, as leftists argued that he should’ve just rejected the creditors’ terms to begin with. In short, the Greeks are also squabbling among themselves.

Where does that leave Greece?

If the Greek government and its creditors aren’t able to come up with a plan by August 20, which is the next major deadline for another loan repayment to the ECB, the central bank might have no choice but to provide additional emergency funding again. Tsipras has reiterated that exiting the euro zone is not an option since this would mean a huge devaluation and an even worse depression for the country.

However, Tsipras seems to be tired from making all these big decisions so he called for an extraordinary party congress in September to allow them to review the spending cuts being implemented and to bring in new members to the parliament, hopefully kicking some of the leftist dissenters out of the room. Now that sounds like the least fun party I’ve ever heard of!

What does this mean for the euro’s forex price action?

Uncertainty hasn’t been doing the euro any good, as this latest batch of squabbles triggered another round of selling for the shared currency. Some forex market analysts say that Greece is back to square one when it comes to striking a third bailout deal, as the IMF upped the ante with calls for debt relief and even harsher spending cuts.

At this point, it looks like neither the creditors nor the Greek government officials are willing to throw in the towel. Greece has already been backed into a corner but the creditors are now being asked to absorb some of the punches. Either way, this is shaping up to be another messy forex round for the euro.