ATHENS- Greece is approaching political and economic turmoil as the country's creditors and the leftist government of Prime Minister Alexis Tsipras dispute over the mixture of the policy measures that will ensure the medium-term fiscal solvency of the country.
On Wednesday, euro zone lenders halted 45 billion euro ($47.7 billion) in short-term debt relief to help the indebted country, which is suffering from a deep recession and high unemployment. This came after the Greek government proposed to make a one-off payout to pensioners in December.
Freezing the flow of funds to Greece now threatens to trigger a renewed flare-up of the Greek debt crisis and would create a further test for the cohesion of the European Union. The debt relief was intended to help weak Greek banks shore up liquidity.
Just as concerning, it precludes Greece from participating in the EU's quantitative easing program.
Market slide
In response, the Athens stock market fell by 3 percent, while the yield on Greece's 10-year government bond rose by 4 percent to its highest level in almost three weeks (7.1%).
The harsh move by the EU came after Greek Prime Minister Alexis Tsipras announced last week that 617 million euro ($654 million) will be distributed to 1.6 million low-income pensioners as emergency support, while the scheduled VAT hike on the islands of the north Aegean Sea — which are bearing the brunt of the refugee crisis — will be suspended.
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Currently, 1.2 million Greek pensioners live below the poverty level. At the same time, Greek islands in the north and east Aegean are being crushed by an increasing flow of refugees as Turkey releases thousands landing on its shores.
As Tsipras explained, these actions were taken because Greece exceeded its primary surplus target of .5 percent of GDP stipulated under its rescue plan for 2016. But he did not communicate with creditors or institutions that monitor the Greek rescue plan before making these decisions.
No immediate resolution
On Wednesday, Germany asked the institutions involved in Greece's aid program — the IMF, European Central Bank and the ESM — to assess whether Tsipras' actions are compatible with its EU bailout obligations.
Michel Reijns, spokesman to Eurogroup chief Jeroen Dijsselbloem, said in a statement that "the institutions have concluded that the actions of the Greek government appear to not be in line with the agreements." He added that some member states see it this way also and thus there is no unanimity now for implementing the short-term debt measures. "We await a full report of the institutions in January," he concluded.
Last week the finance ministers of Eurogoup reviewed Greece's economic progress to finalize a budget for 2017 and set a fiscal target for 2018 of 3.5 percent of GDP to be used as a primary surplus to pay back creditors. They pushed for more labor and reform measures, which called for lifting restrictions on collective dismissals in the private sector, suspending collective bargaining and weakening trade union laws.
According to the IMF's chief economist Maurice Obstfeld and the head of its Europe division, these new austerity measures are not realistic and cannot be attained.
Poul Thomsen, director of the IMF's European department, aired doubts over the austerity targets baked into Greece's 86 billion euro ($91 billion) bailout program, raising fresh questions about the fund's financial participation in the three-year rescue.
"We think that these cuts have already gone too far, but the ESM program assumes even more of them," the IMF wrote in an article, adding, "We do not believe that Greece can come close to sustaining even a modest primary surplus and realize its ambitious long-term growth target without a radical restructuring of the public sector."
On Dec. 16 Tsipras will travel to Berlin to meet with Chancellor Angela Merkel to discuss Greece's financial issues, the future of Cyprus, the migrant crisis and the relations between the EU and Greece's eastern neighbor, Turkey.
Experts say Tsipras is looking for a compromise formula between Germany and the IMF. Grappling with slumping popularity, it is likely the ruling left-wing Syriza party will face snap elections in 2017.
— By Nasos Koukakis, special to CNBC.com
