Against a backdrop of deteriorating economic conditions, worsening social unrest and rising political tensions in Athens and Berlin, the Greek debt crisis increasingly looks like a powder keg ready to explode.
As European policy makers do their best to delay the day of reckoning for Greece and its unsustainable debt, the country is facing a new wave of political opposition and public demonstrations - including 80,000 protesters in central Athens last Sunday - that will make it tougher for the beleaguered government to push through the austerity measures demanded by its putative rescuers.
Adding to the government's woes are the latest dismal economic numbers. The unemployment rate climbed to 16.2 per cent in March, a jump of more than a third from a year earlier and the second-highest level in the euro zone after Spain. The number of young Greeks out of work soared to 42.5 per cent from 29.8 per cent a year earlier. And prospects of any improvement are growing dimmer as the economy marks its third year of recession. Industrial output plunged 11 per cent in April from a year earlier.
On Wednesday, Greek Prime Minister George Papandreou faced down dissenters within his ruling Socialist party, warning that the government must impose heavier cuts and speed up its privatization program, conditions demanded by the European Union, the International Monetary Fund and the European Central Bank in exchange for the second emergency bailout in a year. Athens reached the tentative deal for the rescue last week.
A backbench revolt would spell parliamentary defeat of the government's economic plan and possibly doom EU efforts to prevent the first default by a member state, putting the fate of the euro zone and its common currency on the line.
"The political situation in Greece right now is key," said Marko Papic, a senior analyst with Stratfor, a global intelligence company in Austin, Tex.
The situation in Berlin is another crucial variable in the complex equation, because the rescue can't proceed without Germany taking the lead.
Under pressure from within its own ruling coalition and an increasingly restive electorate, the German government is moving toward a bailout plan that will require bondholders to accept a seven-year extension of maturities, essentially a so-called soft default, which has been adamantly opposed by the European Central Bank, the French government and private creditors.
German Finance Minister Wolfgang Schauble bluntly called for what amounts to a haircut for the private sector. The ECB rejects any maturity extension, because it would immediately have to write down the value of billions of euros worth of Greek bonds it holds as collateral in exchange for loans to the Greek banks.
Mr. Papandreou has managed to steer the new austerity measures through his party leadership. But a crucial parliamentary vote is unlikely before the end of June, which is about the time experts calculate Athens will be running out of time and money.
"The danger for Papandreou is that he will lose control of his party. Remember that in 2010 he had to evict four parliamentarians that opposed the initial austerity measures, which lowered his majority to just six seats," Mr. Papic said.
Greece must redeem a €6.6-billion ($9.4-billion) bond issue on Aug. 20, as well as the final payment on the coupon. But that is only the biggest of the demands on the country's capital. It faces a fiscal deficit cost of an average €1-billion a month and another €500-million outflow to meet payments on bond coupons.
"So Greece can run out of cash at any time," said Carl Weinberg, chief economist with High Frequency Economics in Valhalla, N.Y. "We're now really in uncharted territory and we're in the hands of the politicians."
Mr. Weinberg surmises that the critical date is probably the end of June, because the IMF, which is keeping close tabs on Greek finances, had said it hoped to have a relief package in place by the beginning of this month.
"The system to build bridge loans for countries that need money in a hurry never considered the possibility that those countries wouldn't have a functional or agreeable government," he said.
Yannis Stournaras, director-general of the Foundation for Economic and Industrial Research, an independent economic think tank in Athens, does not think the public demonstrations will translate into mass social unrest that could turn violent, as it did last year, when three bank employees died when their bank branch was firebombed.
The demonstrations so far are unfocused and the Greek middle class has yet to become angry, he said. "They still have a lot of money, so their lifestyles are intact."
Many Greeks think a general election is imminent, although the government said it has no intention of taking what a spokesperson called the easy way out of the current crisis by calling one.
Mr. Papandreou "is losing the ability to lead this country," said Mr. Stournaras, who thinks the Prime Minister will have to go to the polls to try to form a strong government with the backing for reform.
The problem is that the governing Socialists have lost their edge in the polls over the opposition New Democracy party, which they defeated in 2009. The result could be a stalemate that would make it even harder for the Greeks to extricate themselves from their financial mess.
Close observers of the unfolding crisis are skeptical Greece can avoid some sort of default, regardless of the political outcome, a view underlined in the markets, where Greek debt has been hammered.
Equally troubled Portugal, meanwhile, is slated to run out of money even sooner. A €5-billion bond redemption comes due next Wednesday.
Eric Reguly