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After jumping over one hurdle, Greece faces another with pensions

Greek Prime Minister Alexis Tsipras
Christian Hartmann | Reuters

Don't look now, but 2016 may bring a host of new troubles for Greece, which just last week barely overcame a dispute with its international creditors.

Struggling to meet the demands of its bailout terms, the Hellenic Republic was forced on Thursday to scrap an effort to alleviate the burden of its austerity program on poorer Greeks.

The demise of its so-called "parallel program", although a short-term defeat for Prime Minister Alexis Tsipras, triggered the release of 1 billion euros ($1.085 billion) in new bailout funding, expected to be disbursed as early as Monday. The money was part of an agreement that was sealed last summer.

Now, momentum shifts to pension reform, which is expected as soon as next month. The battle will take shape just as the Greek government appears to have won a hard-fought consensus with creditors on other outstanding issues such as deregulation and the establishment of a privatization fund – which must gather 50 billion euros ($54.5 billion) by 2030.

A pension system overhaul, however, is shaping up to be a big hurdle for Greece, a hard sell at a time when the country's economic crises have sent unemployment skyrocketing above 25 percent and average income plummeting 25 percent over the last four years.

"Both the government's willingness to reform and its internal cohesion appear to be weak which does not bode well for the prospects of reform," said Stathis Kalyvas, a professor of political science at Yale University and the co-director of its Hellenic Studies program.

"On the flip side, there is no real alternative for the government right now and the fact that it has already embarked on reform process following last summer's agreement will be pushing it to implement it sooner rather than later"

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Greece challenge is to convince its creditors that it can reduce government expenditure by up to 1 percent of its economy via pension cuts. But in a country where the social costs of austerity weighs on the mood of the general population, some think new pension adjustments could be the straw that breaks the camel's back.

Some of the government's 153 MPs have already made clear that they will not support new cuts to pensions. If as few as three MPs vote against pension reform, analysts say it is likely the government will lose its majority, once again sinking back into political crisis.

For this reason, the Syriza government wants the International Monetary Fund to pull back on its demands for pensions cuts.

Yale's Kalyvas told CNBC that pension reform is not just a matter of fiscal consolidation, but fixing a system that is unsustainable and inequitable system. "Right now, the funding of existing pensions is insufficient and the process will be aggravated due to the demographic imbalance of Greece.

Greek pensions receive more than 50 percent of their revenue from the government, and its population is aging rapidly. "It is, therefore, important to fix this problem now as opposed to wait for the future when it will have grown worse" Kalyvas said.

According to Kevin Featherstone, a professor of London School of Economics, Greece's struggles emanate from inherently flawed public institutions, socio-economic inequality and a lack of agreement between unions and business on the way forward.

Those problems can't be solved by throwing more international money at the country in the form of a bailout, he added.

"Europe's bail-out strategy has been fundamentally misconceived" Featherstone told CNBC. Featherstone further explained that the austerity strategy is fundamentally flawed: "By itself, it is not a sensible way to recovery. Deflating the economy now is misguided."

Still, he also agreed that the country's pension system was badly in need of reform.

The added instability of the migrant crisis could also affect Greece's ability to manage fallout from its wrenching economic reforms, some say. The Hellenic Republic is struggling to manage the flow of more than 700,000 Syrian and Iraq refugees.

The migrant crisis is heaping additional pressure on Greece, which like numerous other European Union (EU) countries is spending vast sums to manage the displaced. Broadly speaking, it may also affect the willingness of EU countries to deal with yet another Greek meltdown.

Featherstone believes that refugee crisis poses a "huge threat" to Europe. "It's one more episode that shows that Europe is failing the test of 'burden-sharing."

The reform fatigue in Greek society and the refusal of the major parties to cooperate on structural changes are negative factors for the country, buy analysts still believe that Greece will get back on the right track.

"Is Greece doomed? No, of course not," Featherstone said. "Politics is about making the right choices and there is still scope for Greece to do so."