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Not again? Why Greece could be on track for another bailout

Protesters shout slogans during a demonstration against a new package of tax hikes and reforms in front of the parliament building in Athens, Greece, May 22, 2016.
Michalis Karagiannis | Reuters

After nearly 10 years of crippling austerity, contraction, brinkmanship and bailouts, the Greek economy returned to growth in 2016. However this good news could soon be eclipsed as fears are raised that the Athens government could soon have to ask for another financial rescue.

The Greek government and its creditors -- the International Monetary Fund, the European Central Bank and the rest of the European Union -- , with the Europeans asking Athens to carry on with reforms to pave the way for further disbursements of its 86 billion euro ($91 billion) bailout.

The second review of the bailout program has been postponed and, at the moment, there isn't a date for creditors to return to Athens to make sure that the government is sticking to the terms of the bailout and therefore eligible for further payments. This brings into doubt the medium- and long-term economic sustainability of Greece.

According to Societe Generale, without the second bailout review concluded, Greece will struggle to repay 8 billion euros ($8.51 billion) it owes government and private investors due next July. Furthermore, talks on debt relief measures will be stalled.

"Without large debt relief, Greece will be unable to issue new debt any time soon. Another programme would thus be needed," Yvan Mamalet, senior euro area economist at Societe Generale said in a note published late last week.

He told CNBC over the phone that it would be "very difficult" for Greece to go back to the markets once the program is concluded and fund itself at low costs if it hasn't lowered its debt levels.

And that's at least a year away: For Greece's European creditors, the country cannot be granted significant debt-friendly measures before the program is concluded in 2018. t - including opening up its labor markets and making it easier for new entrants to enter established industries.

"We have to work more on the same sticking points as before: Greece's labor and product markets, its energy sector and other areas including a small amount of fiscal measures needed to reach the budgetary target agreed for 2018," an EU official, who asked to remain anonymous because of the sensitivity of the talks, told CNBC via email Monday.

The same official added that an agreement on Greece's medium-term fiscal strategy, for the years beyond 2018, was also required. The third Greek bailout program is due to expire in June 2018.

The elephant in the room…the IMF

It has been more than a year and a half since Greece obtained an agreement for a third rescue program. However, up until now, .

The IMF deems Greek debt to be unsustainable and wants to see debt-relief measures implemented to participate in the bailout. However, European creditors are reluctant in providing significant debt relief. At the same time, it is crucial for them to have the IMF on board, mainly at the technical level, which gives credibility to the bailout program.

"The elephant in the room is IMF's participation in the program," the EU official told CNBC.

"In the German government press conference, the finance ministry spokesperson said IMF's participation in the program is indispensable and expressed a belief that IMF will take part in the program. In fact, this is the same old situation– some countries want and need IMF in the program for the credibility of the program, but IMF, to be in the program, asks the same countries to guarantee Greek debt to be sustainable but those countries are unwilling to do it before program runs out – so it is a snake biting its own tail. There needs to be some movement for deal to see daylight and backstage work continues to that effect," the official added.

Another EU official, who also asked to remain anonymous, told CNBC over the phone that there was no deadline for the IMF's decision, but given that it's been a year and half into the program, the IMF should make a decision "as soon as possible."

"European institutions want the IMF's participation, not necessarily its money," the official added.

Mamalet of Societe Generale suggested in the note that the IMF could decide to participate only at a technical level.

An IMF board meeting is scheduled for February 6. The IMF wasn't available for comment at the time of writing.

Greece could be heading towards fresh elections

Another potential hurdle in Greece's rehabilitation is the possibility of early elections.

Prime Minister Alexis Tsipras no longer holds as much popular support as he did when he took the government, when Greek voters were frustrated with austerity. In fact, recent opinion polls suggested that the center-right party New Democracy could return to power in fresh elections.

A new government led by a traditional establishment party could be well received by the markets, Mamalet told CNBC, but any new government would want to renegotiate points of the bailout, which could disrupt market conditions.

Plus, amid the heavy political calendar in Europe, which kicks off in March with elections in the Netherlands, all that Europe doesn't need is further political and economic instability in Greece.

"And now, when Greek economy is finally recovering and we actually expect strong economic growth, I think it would be very unhelpful to fall back into financial instability and some unproductive discussions regarding the Greek programme," Valdis Dombrovskis, vice-president of the European Commission told journalists on Friday.

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