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Trying to understand the Greek crisis

Greece is making headlines again for being at another impasse with its European creditors and the International Monetary Fund.

Eurogroup President Jeroen Dijsselbloem said the deadlock is not likely to be broken when euro zone finance ministers meet in Brussels on Monday and at the moment there's no clear timeline as to when that will happen. This raises uncertainty surrounding the implementation of the third Greek bailout program and fears that Athens may default on its debt, again.

CNBC takes a look at why they are at odds and what are the consequences for Greece and the wider euro area.

Why the ongoing impasse?

Under the Greek bailout program, Athens and its creditors agreed on a number of areas that Greece has to reform to keep receiving tranches from the 86 billion euro ($ 92 billion) bailout program.

Now, European creditors want further reforms on the labor market and energy sector – without that they have refused to release more money to Greece.

"They (Greece) aren't willing to legislate measures," Athanasios Vamvakidis, global head of G10 forex strategy at Bank of America Merrill Lynch, told CNBC over the phone on Friday.

Both sides were hoping to have an agreement on these issues last October, in order to conclude what they call the second bailout review. Only the conclusion of the second bailout review will allow Greece to get the green light for fresh money.

Could this impasse drag on?

"We will see progress when Greece runs out of money," Vamvakidis from BoA told CNBC.

We've seen these impasses before, only to witness a last minute resolution when Greece is close to defaulting on its debts. For instance, in 2015, both sides allowed a similar impasse to drag on for several months. It dragged for so long that Greece even failed to make a payment to the International Monetary Fund.

At the time, this was the trigger for the third and ongoing bailout program.

Standard and Poor's said in a note last month that "risks to program disbursements remain."

Why has the IMF not joined the third bailout?

Another issue in the Greek bailout program is the role of the International Monetary Fund.

The IMF has made its participation on the third bailout program conditional on "significant" debt relief.

This is a tricky issue for Greece's European creditors. They've refused any sort of haircut and have instead committed to giving some short-term debt relief, by extending debt maturities, for instance. They also said they are willing to give more significant debt relief measures once the program concludes in August of 2018.

The IMF has said debt relief doesn't need to take place now, but the Fund wants clear guarantees that it will happen and how it will happen. Without those specific commitments, the Fund is reluctant to join the bailout.

"Although we view these short-term debt measures as helpful in backstopping the sustainability of Greece's concessional debt burden, we don't see future net present value reductions as equivalent to frontload principal write-downs if the goal is to restore confidence in Greece's solvency, and to enable Greece to finance itself in commercial debt markets at low interest rates and long maturities," Standard and Poor's said in a research note on January 20.

Why the participation of the IMF is important?

The Fund has participated in previous bailouts of euro zone countries, not just Greece, but also Portugal and Ireland. Its enrollment gives the bailouts more credibility to investors thanks to its technical expertise.

Some countries, such as Germany, Finland and the Netherlands, believe that such credibility is key to the success of the financial assistance program.

"Without the IMF, monitoring the bailout would be harder," Vamvakidis from BoA told CNBC. He added that at the same time, Greece also needs the IMF otherwise debt relief may not be as significant.

However, given that Greece is half way through the third bailout, questions remain as to how much longer the IMF can delay its participation in the program.

What are the risks for Greece?

Chances are that both impasses will continue to drag on, with some analysts expecting a solution by June as the next repayments to creditors are due in July. This brings political and economic risks for Greece.

Some analysts say that Greece could soon see snap elections, because Greeks are increasingly more dissatisfied with the prolonged austerity and the popularity of Prime Minister Alexis Tsipras is becoming slimmer.

"Given the narrow majority of three seats for the Syriza-led government and the rising popularity of the largest opposition party, New Democracy, the probability of implementing long-term reforms, for instance to the judicial system and public administration, seems low," Standard and Poor's said last month.

According to S&P, Greece has lost a third of its economic value since 2009, and investment is set to fall below 10 percent of GDP this year compared to about 25 percent before the financial crisis.

Greece is expected to see growth of 2.7 percent in 2017 but such positive economic forecasts could be impacted with bailout talks dragging on.

What are the risks for the euro area?

Greece's debt drama is playing out against a volatile political environment in Europe. For instance, Germany is unlikely to offer significant debt relief before its election, due after the summer.

Furthermore, as Greece's problems intensify they raise concerns over the stability of the euro area.

Would a Grexit be that bad?

If Greece were to return to the Drachma that could potentially boost its economy but it would still not guarantee that the country would deal with its structural problems, nor would it help the Greek people, Vamvakidis from BoA said. However, it would make Greeks living abroad and those who managed to transfer money out of the country richer.

Money flowing out of banks cannot be used to boost private investment and job creation.

Plus, leaving the euro would raise questions about the common currency as a project. As Moody's explained in a note earlier this week, the euro is an "irreversible currency" – so if suddenly one member would leave, the entire credibility of the euro zone would be at risk.


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