Negotiations to haul Greece back from the brink of bankruptcy are entering their decisive phase.
Greek Prime Minister Alexis Tsipras spent Monday evening on the phone with Christine Lagarde, the managing director of the International Monetary Fund, and German Chancellor Angela Merkel. His deputy, Yannis Dragasakis, travelled to Frankfurt on Tuesday for talks with European Central Bank President Mario Draghi.
Meanwhile, finance minister, Yanis Varoufakis, who was recently sidelined from the Greek negotiating team, also took part in the Greek charm offensive, visiting his French counterpart, Michel Sapin in Paris on Tuesday before holding talks with European Commissioner Pierre Moscovici in Brussels.
This flurry of diplomatic activity could be the last desperate throw of the dice.
Greece’s financial position is growing more precarious by the day. The 40-year-old Greek prime minister has been locked in a tug of war with international lenders over pensions and labor reforms ever since he was elected in January on a platform of jettisoning the austerity imposed in return for the €240 billion in bailouts Greece has received from international lenders since 2010.
The dispute is undermining Greece’s economic recovery. The European Commission on Tuesday cut its forecast for Greek gross domestic growth to a meagre 0.5 percent this year. Three months ago, it had predicted Greece would grow 2.5 percent in 2015 after a 1.0 percent expansion last year. Furthermore, the debt-to-GDP ratio is projected to reach 180.2 percent, which is regarded as unsustainable.
The country has reached a standstill. The state coffers are empty, no one’s investing and unemployment remains high. If Mr. Tsipras caves in to creditors, he will face the ire of his voters and the far-left of his Syriza party. If he stands his ground, the country will go bankrupt.
The IMF’s European chief, Poul Thomsen, has warned the euro member states not to be too accommodating towards Greece. If they agree major changes to the current bailout terms, Greece’s financial needs will grow, he told the Eurogroup of euro zone finance ministers at their meeting in Riga last month, several people familiar with the talks told Handelsblatt.
He added that if Greece failed to stabilize its finances under the terms of the current aid program, there would have to be a debt write-off. It was crucial to the IMF that Greece remain able to shoulder its debts, he said. Otherwise, the IMF would refuse further aid payments. It was a clear threat.
However, on Tuesday Germany's finance minister, Wolfgang Schäuble, denied that Mr. Thomson had been so clear cut as to call for debt relief.
"The IMF of course did not make such a comment," he told members of the foreign press association in Berlin.
Absolutely no one in the Eurogroup wants a debt cut. Source close to negotiations
For Ms. Merkel and Mr. Schäuble, it’s essential that the IMF remains part of the bailout program. If it doesn’t, there would be uproar among Ms. Merkel’s party, the center-right Christian Democrats. But a debt write-off would be just as bad. After all, it would mainly affect the loans paid out by European governments, and Germany has been the biggest contributor to the two bailouts.
“Absolutely no one in the Eurogroup wants a debt cut,” said a source close to the negotiations. That leaves only one option: that Greece implement the reforms dictated by the rescue program. “There’s no alternative to that,” said one euro zone official.
But the Greek government is rejecting many of the elements of the bailout programs that previous governments signed up to. It’s now negotiating with the institutions formerly known as the troika -- the European Union, the European Central Bank and the IMF -- about which of those reform measures could be replaced by others.
The talks are turning into a good cop, bad cop affair, with the European Commission taking a “soft” stance, said sources close to the talks. The IMF, meanwhile is talking tough, particularly when it comes to pension cuts and labor reforms.
In an unofficial paper leaked on Tuesday, a Greek government source complained that the “disagreements and contradictions” between the IMF and the European Union were creating “obstacles” in the negotiations.
Meanwhile, in Berlin, Mr. Schäuble has voiced doubts whether the next meeting of euro finance ministers on May 11 will reach a deal. “I won’t rule it out,” he said. But he added he was “fairly skeptical if that will be possible by Monday.”
Athens is running out of time. On Wednesday the country managed to transfer an interest payment of €200 million, to the IMF, avoiding default. However, next week, on May 12, it’s due to repay a much larger loan of almost €763 million to the IMF.
Greek Deputy Defense Minister Kostas Isychos said on Tuesday that Greece shouldn’t make that payment. Paying out pensions and public employee salaries should take precedence, he told Greek radio station Parapolitika.
Eurogroup officials said they have no idea how long Greece’s money will last. But they don’t think Mr. Tsipras will risk a default.
The ECB might ride to the rescue. If Greece agrees a reform package with its euro partners, the ECB may loosen on its restrictions on selling short-term debt, said central bank sources. At present, the volume of Treasury bills Greece is allowed to issue is capped at €15 billion. The ECB’s executive governing council will discuss a loosening at its meeting today.
They will also talk about whether to agree to a further extension of Emergency Liquidity Assistance (ELA) for Greece's banks. Last week they raised the ceiling by another €1.4 billion to €76.9 billion. The increasing volume of ELA has recently been criticized by some members of the ECB’s Council.
Meanwhile, a new survey among German corporate executives shows a majority of them now support a Grexit. The Handelsblatt Business Monitor, a survey of 673 top managers conducted exclusively for Handelsblatt by the Forsa polling institute, shows 44 percent believe Greece should quit the euro voluntarily while 13 percent said it should be expelled. Only in big companies is there still a small majority of senior executives that favor Greece remaining in the euro zone.
In addition, 79 percent of managers believe a Grexit wouldn’t trigger a domino effect in which other ailing states may also be forced out of the euro.
At the height of the euro crisis, between 2010 and 2012, there were fears that a Grexit could break up the euro zone. But the bailout funds set up by European Union and the ECB’s pledge to defend the euro calmed financial markets and crisis-hit countries like Ireland, Spain and Portugal are improving.
As a result, only one in six German managers said they feared a Grexit would spark a new financial crisis, the survey showed.
Jan Hildebrand is the deputy head of Handelsblatt’s Berlin bureau, Gerd Höhler is the paper’s Athens correspondent, Axel Schrinner is an editor on the financial desk. Siobhán Dowling, an editor with Handelsblatt Global Edition, contributed to this article. To contact the authors: [email protected], [email protected], [email protected].