THE NEXT days will be crucial. Inspectors from the EU/IMF/ECB "troika" are on their way back to Athens for talks on a new bailout loan and German MPs vote tomorrow to expand the powers of Europe's bailout fund, writes ARTHUR BEESLEYin Brussels
Both events have potential to radically alter the course of the debt crisis.
Greece will go bankrupt next month if it does not receive another €8 billion loan from its international sponsors. In Berlin, meanwhile, the political authority of Chancellor Angela Merkel is on the line as she tries to ensure bailout-wary deputies vote for the overhaul of the fund.
The return of the troika to Greece – today or tomorrow – comes amid creeping doubt about the country’s new austerity plan.
In short, euro zone officials say Athens may have to come up with yet more cuts and tax hikes if it is to achieve the fiscal targets set out in its ailing rescue programme.
In the background, there is considerable talk about the possibility of an “orderly” default. This is not an immediate prospect, however, and the country remains under pressure to execute huge fiscal savings.
After two nights of telephone talks with the troika, the government approved a new budget package last week. The initiative is deeply controversial, raising questions in Europe as to whether the administration led by prime minister George Papandreou can survive much longer. The plan includes pension cuts, a property tax and the placing of 30,000 civil servants on one-year’s notice with a 40 per cent pay cut.
Severe as it is, however, there is concern within the troika that it does not go far enough. With face-to-face talks now set to resume after a hiatus of nearly four weeks, official and diplomatic sources say serious deficiencies remain to be resolved.
Although any new measures would intensify pressure on the government, the sources say Germany and other wealthy euro zone countries have made it clear they will not tolerate gaps in the plan. Still, Greek finance minister Evangelos Venizelos declared confidence yesterday that the country would receive the €8 billion. His sense of certainty may well flow from the fact that Greece will default without the money, something Europe’s leaders still pledge to avoid. Diplomatic sources warn, however, that he would be very unwise to assume Greece will get the money if the plan falls short.
That is to say nothing of implementation, always a concern in the Greek context. Mr Papandreou’s government promised to do its homework many times before but failed to deliver, fuelling no end of exasperation in Europe.
Then there questions over the viability the plan itself.
As confidence in the bailout wanes, there is more and more talk about an “orderly” default, in which Greece’s creditors are compelled to take a 50 per cent discount on their investment.
Despite the objections of the ECB , this is no longer held to be anathema in the euro zone. The debate is evolving but seems unlikely to be settled by the time Greece must get the €8 billion.
Still, Europe is under pressure as never before to finally calm the debt debacle.
Because any initiative to reduce the burden of Greece’s debt could create panic in markets, moves are also under way to boost Europe’s bailout fund again and to recapitalise a swathe of vulnerable banks.
It is in this context that tomorrow’s vote in Berlin will be pivotal. In question is whether Dr Merkel needs votes from opposition MPs to win approval for an overhaul of the bailout fund which was agreed in July.
This is but a first package of reforms to the European Financial Stability Facility. A further push to expand its operations stems from the need to protect Italy, Spain and the wider euro zone from the fallout from any Greek default.
Berlin remains ultra-cautious. However, claims by finance minister Wolfgang Schäuble that no such moves are imminent reflect concern to prevent any slippage in support for the July reforms among government MPs.
The scene remains highly volatile and the stakes are rising all the time.