Brussels blog

Greek riot police confront protestors in front of parliament in Athens on Wednesday

Just as one Greek crisis appears to be dissipating, another one flares up that risks pushing Athens into default in a matter of weeks. For those struggling to follow along, here’s another one of our quick primers – and a guide for what to watch for in the coming days.

For much of the last month, officials have been fretting that unless they can piece together a new €120bn bail-out for Greece by next week, Athens would run out of money. The first default by an advanced economy in 60 years would ensue, potentially wreaking havoc across the eurozone.

The reason behind the fear was a complicated domino effect that started with the International Monetary Fund: the IMF was going to withhold its €3.3bn in aid due this month unless the European Union could ensure Greece could pay its bills for another year. Greece, however, is going to be unable to pay its bills next year without a new bail-out.

The second domino came in Germany: The new bail-out was being held up by German insistence that private holders of Greek bonds feel some pain in the new bail-out by “voluntarily” swapping their current holdings for new bonds that wouldn’t be repaid for another seven years.

That crisis, though, appears to have been resolved – at least for now. The solution is a classic EU fudge: the IMF will make its payment after all, meaning the urgency to get a bail-out done by the end of next week has dissipated. But there is a new IMF condition, which brings us to the new crisis: the IMF and the EU want a commitment by the Greek government that it will be able to pass a new round of austerity measures before they give the go-ahead to the new funding.

The government of Greek prime minister George Papandreou, however, is on the verge of collapse over his efforts to pass those very measures, with members of his own party defecting one-by-one.

So the action for the next few days moves to Athens: Can Papandreou get a cross-party agreement on the austerity measures in time to get the €3.3bn from the IMF it needs, which comes with an additional €8.7bn in aid from eurozone countries? Right now, it’s not clear he’ll be able to do it.

If the political crisis in Athens stretches on for several more days, the debate is likely to shift back to Brussels and Washington: Should the IMF and the EU disburse the €12bn in aid even without assurance that Athens will live up to the austerity commitments, which were hammered for weeks in May by the so-called “troika” of international negotiators – the IMF, the European Commission, and the European Central Bank?

That would be a very tough sell for all involved, but may become necessary to avoid complete implosion.

One last thing to note: the so-called German domino hasn’t completely gone away. There are signs Germany is softening its position, but European leaders say there is still a commitment to get bondholders involved some way – most likely a more purely voluntary programme where creditors simply agree to buy new, longer-maturing Greek bonds when their current holdings come due.

But because of the IMF concession, that decision has been put off until the next meeting of eurozone finance ministers on July 11 – even though the next Greek aid tranche isn’t due until September. “We cannot wait and see until September,” one European official involved in the talks told me. “It has to be decided in July.”

Hold onto your seats. It could be a bumpy ride.