In June, if you had asked a typical investor—whether in U.S. municipal bonds, global equities or Asian corporate debt—about Greece, he or she likely could have described in great detail the differences between the Samaras-led New Democracy party and the Tsipras-led Syriza party. But since the election, the market focus and frenzy has faded. Events in Europe have centered on Spain (or on August holidays) and Greece has been replaced in the headlines. However, the fact remains that Greece is still on an unsustainable debt path, and without a new tranche of funds, it will run out of money sometime in October.
In order for the indebted nation to receive the next round of official aid, Greece needs to pass a review by the International Monetary Fund (IMF). It is already clear that the program is off-track, but this is mainly because Greece’s GDP has contracted so sharply. The Greek government has actually taken significant steps to meet reforms, including the finalization of an €11.5 billion ($14.4 billion) cut in spending over the next two years, along with structural reforms. For example, politicians have indicated a renewed push toward privatization programs designed to contribute to fiscal consolidation in segments of the Greek economy, such as transportation, public real estate and utilities.
Despite these positive measures, Greece will still have to do more. The IMF, the European Commission (EC), and the European Central Bank (ECB)—fondly referred to as “the Troika”—will not sign off on another tranche unless debt loads look sustainable into the future. I believe that the only way this can happen is if either or both of the following actions are taken: official creditors, including the Troika, write-off of Greek debt (otherwise referred to as official sector involvement, or an OSI); and/or Europe or the Troika agrees to inject money down the road. Politically, it will be difficult to pull off an OSI. It may be easier and more feasible to do a direct capitalization of Greek banks via the European Stability Mechanism, but that will likely take more time to agree to and implement than Greece has left.
Many banks, most notably Citi, have vocally argued that a Greece exit from the European Union is highly probable within the next 12 months, possibly as early as October. I believe that getting through the first review is probably good enough to kick the can down the road for now. But until Europe puts money in Greek banks and/or official creditors take a haircut—and the ECB is cranky when it comes to debt haircuts—Greece will never be able to afford to pay back all its debts.