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10/12/2016

Europe ready for ‘worst case scenario’ on Greece

Euro & Finance

Europe ready for ‘worst case scenario’ on Greece

German Chancellor Angela Merkel arrives at the eurozone summit in Brussels, 7 July 2015.

[European Council]

Eurozone leaders issue an ultimatum to Greece at a summit in Brussels yesterday (7 July), giving Athens until Thursday to present new cash-for-reform proposals.

EU summit statements are usually thin on drama but yesterday’s eurozone summit was clearly different.

“Our inability to find agreement may lead to the bankruptcy of Greece and the insolvency of its banking system,” warned European Council President Donald Tusk after the Brussels meeting ended yesterday evening without a deal.

“And for sure, it will be most painful for the Greek people,” he said, reading out a statement prepared in advance by the 19 heads of state and government of the eurozone.

The patience of eurozone leaders with the leftist government of Alexis Tsipras is wearing thin and the conclusion of yesterdays’ summit sounded like an ultimatum to Athens.

The Greek government was asked to set out the details for “a comprehensive and specific reform agenda” on Thursday (9 July) in exchange for new financial assistance.

“If this does not happen it will mean the end of the negotiations with all the possible consequences, including the worst-case scenario,” Tusk warned, suggesting a Greek exit from the euro had now become a distinct possibility.

For the first time, Tusk’s comments had an unusual sense of urgency.

“Until now, I have avoided talking about deadlines. But tonight I have to say loud and clear that the final deadline ends this week,” said the former Polish Premier.

‘Plan B’

Austrian Chancellor Werner Faymann was equally cautious, warning that if there was no deal on Sunday (12 July), eurozone governments would have to prepare “Plan B,” code for Greece being excluded from the single European currency bloc.

Even Jean-Claude Juncker, the President of the European Commission who has worked tirelessly to keep Greece in the euro, said he now had detailed plans to cope with a “Grexit” if Tsipras failed to deliver.

“We have a ‘Grexit’ scenario prepared in detail,” he told a press briefing after the meeting.

German Chancellor Angela Merkel set the tone as she walked in the Council’s Justus Lispsius building in Brussels yesterday afternoon, saying she was not optimistic that a deal with Greece could be reached on time.

“There is currently no basis to start talks with Greece” about a new financial aid programme, she said, as Athens did not put new proposals on the table.

The Sunday meeting will be “make it or break it,” she warned, saying “the situation is uncertain”.

“We only have few days left before Sunday”.

3rd bailout programme

The eurozone leaders said they expect Greek Prime Minister Alexis Tsipras to request a new financial aid programme from the European Stability Mechanism alongside new reform proposals by Thursday.

Under the agreed timetable, Greece will submit a formal request for a two-year loan programme on Wednesday, with a first list of reform commitments to be spelled out in greater detail on Thursday.

>> Read: Greece will request new financial programme

If the European Commission, the International Monetary Fund and the European Central Bank approve them, eurozone finance ministers will reconvene on Saturday to recommend opening negotiations on a conditional assistance programme. If all goes according to plan, the EU and eurozone leaders would then rubber-stamp the agreement at their Sunday meeting.

But the conditions for the ESM programme – effectively a 3rd bailout for Greece – are not met yet, Merkel said. New proposals need to arrive on the table by Thursday so she can ask the German parliament to authorise negotiations on a new aid programme on time, she said.

“We are already in a 3rd programme with no legal basis,” she said, adding: “We need to see a long-term perspective with detailed proposals from Greece.”

Bridge financing

Merkel said if Athens came up with satisfactory proposals and took “prior actions” by passing laws to convince creditors of its intent, short-term financing could be made available to help Greece over a repayment hump this summer.

She did not rule out rescheduling Greek debt in the longer run by extending loan maturities, lowering interest rates and allowing a longer moratorium on debt service payments, but she said a “haircut”, or writedown, was impossible because it would be illegal.

Eurozone sources said bridge financing could be provided by “Greece’s friends” and by releasing past ECB profits on Greek bonds to prevent Athens from missing a crucial €3.5 billion bond redemption to the ECB due on July 20.

Upbeat Tsipras

French President François Hollande struck a more positive note, reiterating that the European Central Bank would ensure that Greek banks had the minimum necessary liquidity to stay afloat until Sunday.

Tsipras, for his part, sounded upbeat as he left the summit, even though many of the reforms demanded by his partners would inflict more pain on Greeks who voted to reject the austerity measures imposed by the country’s international creditors in return for financial aid.

“The discussion took place in a positive climate,” he said. “The process will be extremely fast. It starts in the coming hours, with the aim to conclude by the end of the week at the latest.”

He promised to work for a socially just deal that would bring a “final exit” from the crisis, return Greece to growth and restructure Greek debt to make it viable.

Background

A majority of Greeks on Sunday (5 July) voted "No" in the referendum on the country's proposed rescue package.

The vote leaves Athens in uncharted waters, risking a banking collapse that could force it out of the eurozone.

International creditors said their offers are no longer on the table and that Greece, whose economic situation has further deteriorated, would have to negotiate a new arrangement from scratch.

Speaking to Berlin’s Tagesspiegel newspaper, German Vice Chancellor and SPD leader Sigmar Gabriel said negotiations about a new bailout program are "hardly imaginable“ after Greek’s overwhelming "No" at the referendum.

In a sign that the Syriza-led government in Athens might change its negotiating tactics with creditors, Greece's firebrand finance minister Yanis Varoufakis announced his resignation.

In a statement, Varoufakis said he had been "made aware" that some members of the eurozone considered him unwelcome at meetings of finance ministers, "an idea the prime minister judged to be potentially helpful to him in reaching an agreement".

>> Read: Greek ‘No’ inflicts heavy blow on EU

Further Reading