When the world last left Greece, it was breathing a sigh of relief upon the news that Antonis Samaras would be able to cobble together a coalition following a narrow win in the June elections — the second such election in as many months.

Samaras (pictured above), now a little over six weeks into his government, is finding it increasingly difficult to get his coalition to agree on €11.5 billion in cuts, required by Greece’s bailout from the European Central Bank, the European Commission and the International Monetary Fund.  Those entities, known as the ‘troika,’ have pushed off a long-delayed review of Greece’s bailout program from September to October, but that means only that Greece’s government will have until mid-September to make the cuts. The ‘troika’ will then make a decision about disbursing the next €31 billion tranche of bailout funds to Greece, and Greece will then try to push for a renegotiation of the bailout terms to lighten the austerity that has added pressure to Greece’s downward economic spiral.

It’s clear that the ‘troika’ is getting impatient: the IMF has started to balk at throwing more money at Greece, has called on the European Union to take the lead on any further bailouts and the ECB in late July stopped accepting Greek bonds as collateral altogether.

But the Greek economy is in shambles, and is expected to contract by a full 7% this year — much more than an original forecast of 4.7%.  Greece’s recession is only getting worse, not better, and that’s after the economy contracted almost 14% in the past four years.  As tax receipts correspondingly shrink, Greece’s debt sinkhole becomes ever larger.  Greater debt requires more austerity, which cripples the economy, which leads to greater debt, and so on.

The only solutions seem to be:

1. a miraculous economic turnaround. Not likely anytime soon.
2. a full bailout from the European Union. Whether that means a direct cash bailout or “eurobonds” or a more inflationary ECB monetary policy, it all boils down to a transfer of wealth from Germany to Greece  — it’s an option that German chancellor Angela Merkel has resisted and which has become increasingly unpopular in domestic German politics.
3. the “Grexit”. Greece leaves the eurozone, adopts a new drachma, and devalues it until its debts are manageable and its exports are cheap.  But that could lead to snowballing worries about Spain, Portugal, Italy and the rest of the eurozone and precipitate Europe’s own “Lehman” moment of financial panic.

The next deadline is August 20, when Greece must pay a €3 billion maturing to the ECB — and the ECB (despite its edict that it will no longer accept Greek bonds as collateral) is weighing the option of lending money directly to the Greek central bank (which can accept Greek bonds as collateral), so that Greece in turn can pay back the debt it owes to the ECB.

It’s a tidy Alice-in-Wonderland arrangement in which only a central banker could delight.

ECB president Mario Draghi deserves credit for getting Greece past yet another hurdle, but it doesn’t inspire any long-term confidence in either Europe or Greece to get the country out of its nosedive.  It takes little imagination to see how Greece could bumble out of the eurozone in short order without further intervention if and when it runs out of cash (which could now still happen in September): Greece would then be forced to pay its employees and pensioners in IOUs (think of the kind of IOUs that California issued — registered warrants — when it fell short of cash reserves in 2009), Greece would take longer and longer to pay back the IOUs, individual Greeks would start trading the IOUs for euros, and a market would develop that sets a price for the IOUs in euros.

In time, the IOUs will have become de-facto drachmas.

Meanwhile, the coalition that everyone thought would easily come to an agreement on those additional budget cuts has stalled. Continue reading How many days (weeks) away are we from another Greek solvency crisis? →