From l. to r., Eurogroup chairman Jeroen Dijsselbloem, IMF managing director Christine Lagarde, Irish Finance Minister Michael Noonan and French Finance Minister Michel Sapin
Photograph by Thierry Charlier — AFP/Getty Images

Creditors play hardball as time runs out for a deal to avert landmark default.

By Geoffrey Smith
June 25, 2015

Athens is crying ‘blackmail’, while Angela Merkel says things are going backwards and her central bank chief wants to cut Greece’s banks off from the last lifeline it has. Greece’s Prime Minister is accusing the creditors of wanting to bring down his government, while the creditors talk of Athens’ “amazing” carelessness.

It sounds–and is–fraught, but as Europe’s leaders descend on Brussels for the second time in a week to thrash out Greece’s fate, the differences between the two sides’ negotiations is not as wide as the rhetoric suggests. Nor is it really fair to describe today’s meeting as a ‘last chance’ when there are still a number of small tweaks that can be made to give more time for a bigger one. A deal is only a handshake away in principle, but the price of making it stick, from Athens to Berlin and Washington, may still be unpalatable.

As it stands, the creditors are trying to push this list of conditions on the government in return for unlocking the remaining €7.2 billion in its bailout program. The government is still refusing to accept it. Without a deal of some sort, Greece will almost certainly default on €1.6 billion of debt repayments to the International Monetary Fund next week, triggering a sequence of events that would most probably lead to a collapse of its banking system in short order.

The conditions now under discussion reject most of the Greek proposals earlier this week because they focused too much on tax increases and not enough on the issue of reforming the Greek pension system. According to reports, it was the IMF that resisted yet another short-term fix without addressing the biggest long-term risk to the budget. That’s consistent with the IMF’s admission two years ago that it was a mistake in 2010 to focus so much on fixing the short-term budget balance rather than the structural issues which had created the budgetary mess.

It is, however, a staggering and painful irony to see the creditors rejecting Greek proposals because they were, well, too much like the same old medicine they themselves had prescribed. It also promises further pain for poor pensioners, who will lose the current top-up they are getting by 2020 at the latest and offers no sign of debt relief, a key demand of the Greek side.

“The lenders’ demand to bring annihilating measures back to the table shows that the blackmail against Greece is reaching a climax,” Reuters reported Nikos Filis, Syriza’s parliamentary spokesman as saying on Mega TV.

“There cannot be a deal without a substantial reference and specific steps on the issue of debt,” Labor Minister Panos Skourletis said in an interview with state broadcaster ERT.

ERT was closed down by the previous government of Antonis Samaras as part of the spending cuts imposed in the bailout, and then revived by the Syriza-led government this year–one of many unilateral moves to row back previous measures that Athens promised not to do back in February.

The ‘Eurogroup’ of finance ministers met earlier Thursday without result, and rumors are now circulating of yet another meeting on Saturday to see if the remaining gaps can be bridged. An agreement on Saturday or Sunday could in theory be voted on on Monday by parliament in Greece (and in those creditor countries which have insisted on including their parliaments in on the deal, notably Germany).

Germany’s Angela Merkel and her colleagues have solid enough majorities to ensure that whatever is agreed in Brussels will be passed back home, but Greece’s Alexis Tsipras is in a much less certain position. Both his coalition partners and many lawmakers from his own Syriza party have threatened to vote against any fresh austerity measures, meaning that Tsipras will need the support of opposition parties to pass any agreement. That’s likely to spell the end of his current government.

After being summoned to Brussels Wednesday a day ahead of the summit, Tsipras emerged from hours of talks dropping dark hints that the other side was effectively plotting regime change in Athens.

 

But, as fender stickers down the ages have reminded us, just because you’re paranoid doesn’t mean they’re not out to get you. Reuters reported German central bank chief Jens Weidmann as pressing for an immediate end to the ECB’s emergency short-term loans to Greece’s banks Thursday–a move that would leave Greek banks almost immediately unable to honor withdrawals by customers and trigger chaos.

“The Eurosystem must not provide bridge financing to Greece even in anticipation of later disbursements,” said Weidmann, who also sits on the European Central Bank’s Governing Council, which approves such funding, dubbed Emergency Liquidity Assistance (ELA).

“When banks without access to the markets buy debt of a sovereign which is likewise locked out of the market, taking recourse to ELA raises serious monetary financing concerns,” he said at a conference in Frankfurt.

Weidmann’s comments cut across one of the likeliest short-term fixes that would buy at least a few more days breathing space for negotiations: a temporary increase in the ceiling on treasury bill issuance. The only buyers of such treasury bills right now would be Greek banks, who would then immediately post them as collateral for more loans from the ECB.

Weidmann’s objections were overruled in a conference call Thursday among the ECB’s governing council, with the majority still content to sit out the results of tonight’s talks.

Financial markets have taken a similar wait-and-see approach Thursday. The clearest indicator of market fears, the yield on two-year Greek bonds, is steady at just under 23%, having fallen from 30% earlier this week after Athens first started to offer concessions.

 

 

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