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Apr 16, 2015 12:47 PM

Why it's proving hard to save Greece

The Associated Press

ATHENS, Greece (AP) By the day, Greece is getting closer to a potentially catastrophic debt default that could force it out of the euro bloc.

All it needs to avoid that fate is a deal with its creditors to get more loans yet weeks of wrangling over the terms have produced no sign of progress.

The situation is coming to a head, with Greece struggling to meet debt obligations on a weekly basis. It faces repayments worth 1 billion euros ($1.1 billion) next month that it may be unable to afford without more rescue loans.

Rescue creditors fellow eurozone states and the International Monetary Fund want Greece to agree to a list of economic reforms that the country's new government came to power promising to oppose.

Greece's finance minister, Yanis Varoufakis, will have a chance to meet officials from the IMF and other key creditors at a global conference Washington this week.

But all sides concede that a breakthrough is unlikely by an end-of-April deadline they set to unlock the latest batch of bailout loans, which have been delayed from last summer and are worth 7.2 billion euros ($7.7 billion).

Here's a look at why, despite the high stakes, the two sides remain at an impasse.



Eurozone states and the IMF say they cannot keep pouring billions of euros of rescue funds into a country that refuses to modernize.

"Greece must become competitive. Otherwise it's a bottle without a bottom. And you can't spend hundreds of billions ... on a bottle without a bottom," said German Finance Minister Wolfgang Schaeuble this week.

Greece's problem, the creditors argue, was initially caused by gorging on cheap loans in the good times a decade ago. So reforms should focus on reducing costs. Since Athens started getting 240 billion euros in bailout loans in 2010 to avoid bankruptcy it has slashed pensions, state jobs, and welfare benefits, sold state assets and raised taxes.

For Greece to get more loans, creditors are demanding reforms to make state administration and business rules more efficient: Scrapping multiple tax exemptions, removing obstacles to mass lay-offs for struggling businesses, restarting a major privatization program, and reforming a pension system.

The creditors note that five years of such reforms have improved Greek public finances, while the economy emerged briefly from recession.

But to be confident Greece will be able to repay its rescue loans which have ballooned national debt to 317 billion euros ($338 billion) at the end of 2014 they want assurances that those extra reforms will be made.

Greece is the least competitive economy in the eurozone and the 81st globally, according to the World Economic Forum.



Greek Prime Minister Alexis Tsipras and his Syriza party came to power in January with one main promise: end austerity measures previous Greek governments had agreed to.

Tsipras argues the measures must be redrawn to stimulate growth, and not just cut debt. He blames them for causing a humanitarian crisis: the economy has shrunk by a quarter, leaving more than 25 percent of people without work, and even more without health insurance.

In drawing up the new proposed reforms, Tsipras is focusing mainly on trying to fight tax evasion by the rich. That will only get the government so much money, as much of its massive tax arrears comes from ordinary households and bankrupt businesses.

Tsipras' government has opposed other projects, such as further privatizations, and any talk of limiting job protection rights.

His bargaining position could be limited by having a large far-left faction in his party and nationalist-right coalition partners who demand a tough position against creditors' demands.

The new government's combative style has isolated Greece in the 19-member eurozone but is hugely popular at home, despite the financial risks involved. A weekend opinion poll suggests the Syriza party has a near 25-point lead over rival conservatives, more than double the advantage it had in January.

"It has become well-nigh politically impossible for any Greek government to implement the reform policies being demanded by eurozone leaders," said Joan Hoey, a senior analyst at the Economist Intelligence Unit.



If Greece is to avoid default, a compromise is needed, and Athens is under the most pressure to yield.

Economists say the eurozone is better protected against the financial instability that could come from Greece leaving the euro. Sovereign downgrades and a surge in borrowing rates in recent week caused little market panic outside Greece.

But for Greece, leaving the currency would cause huge economic turmoil, at least in the short term.

In seeking a deal, the Greek government has agreed to some things it had previously ruled out, such as continued external oversight of the country's finances. But lenders are adamant Athens must accept more.

The key could ultimately be Tsipras' popularity, says Yannis Palaiologos, a respected Greek financial commentator and author of the book 'The 13th Labor of Hercules: Inside the Greek Crisis.'

He says Tsipras could compromise and accept some cost-savings reforms in return for more modest budget targets.

"Tsipras could sell it to the public," said Palaiologos. "Convincing his own party might be more difficult."


Follow Gatopoulos at http://www.twitter.com/dgatopoulos


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