BackGreeks under the gun to produce a reform plan to keep euro
Alexis Tsipras has until Thursday midnight to present a plan that includes spending cuts, in exchange for a new European bailout
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Athens/Berlin/Washington: Greece is rushing to pull together a detailed economic package to convince European leaders that it can keep the euro.
The government extended capital controls through Monday, and Prime Minister Alexis Tsipras has until Thursday midnight to present his European colleagues with a plan that includes spending cuts, in exchange for a new European bailout.
The continent’s most indebted country has never been closer to leaving the currency after more than six European leaders made clear this is Greece’s last chance. Failure to get a deal could result in the European Central Bank (ECB) cutting funds to Greek banks, forcing the country to issue IOUs or some other form of exchange to prevent economic collapse.
“Greece has to demonstrate a willingness to follow through and table some reforms extremely quickly," Mujtaba Rahman, an analyst at Eurasia Group, said in a note to clients.
Chancellor Angela Merkel, who as head of Europe’s biggest economy carries the most sway, is willing to let Greece go if Germany doesn’t consider its plans credible, according to two government officials familiar with her strategy who asked not to be identified discussing private deliberations.
Greece can’t look to the International Monetary Fund (IMF) for “special treatment" after falling in arrears, said IMF managing director Christine Lagarde.
Market reaction
The euro and the benchmark Euro Stoxx 600 index were little changed, a sign that investors are confident any fallout from Greece won’t spill over to other countries. Portuguese and Italian bonds rose on optimism Greece would be able to reach a deal, or that the ECB would act to protect other markets.
The leaders of all 28 European Union countries will meet in Brussels on Sunday to decide their response to Greece’s proposals. The ECB said on Wednesday it was leaving the level of aid to Greek banks unchanged. It will meet next Monday to consider its own next moves.
Sunday’s gathering represents the biggest test to a five- year-long effort to contain Greece’s debts, which exceed 170% of gross domestic product (GDP).
Securing a deal with creditors will almost certainly require Tsipras and his Coalition of the Radical Left, or Syriza, to capitulate to changes they have resisted since coming to power in January. Greek voters emphatically rejected a program of spending cuts and tax hikes in a 5 July referendum.
Bailout letter
On Wednesday, Greece sent a letter to the European Stability Mechanism, the entity that co-ordinates financial assistance to member states, requesting a three-year bailout loan. What was missing were specifics.
After months of often-contentious interactions with creditors, the document signed by the new finance minister, Euclid Tsakalotos, struck a relatively conciliatory tone. It said Greece planned to honour all its debts and introduce tax and pension reforms as soon as next week. Tsipras had previously characterized pension cuts as one of the “red lines" Greece would not cross.
The ESM has begun the formal process of reviewing the request, which will be followed with more details by the end of Thursday. Greek banks will remain closed this week and on Monday to stem withdrawals, which are capped at €60 per person per day, causing long lines at cash machines.
“Should the Greek proposals be found wanting, the Europeans will go for Grexit quickly, instead of letting the country slowly slide into ‘Grexit by stealth,’" Gilles Moec, chief European economist at Bank of America Merrill Lynch in London, wrote in a note to clients. Bloomberg
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