Coverage: Greek deadline draws near

Greece is back in the news as creditors are trying to force a deal before $8 billion in bailout funds are set to be released on Friday. Germany called an emergency meeting and didn’t invite Greece.

The New York Times story by Jim Yardley had these details about the meeting and what the European Union is trying to do:

If Europe is finally coming to a moment of reckoning in the Greek debt crisis — a standoff now rattling financial markets and threatening European unity — then the critical meeting apparently occurred late Monday night, when Chancellor Angela Merkel of Germany summoned critical players to an emergency summit meeting in Berlin. Everyone was invited, except Greece.

This was not a big surprise, since those invited were Greece’s creditors, who were in effect trying to form a united front against Athens and speed up the debt talks before a payment due on Friday. But the list of attendees symbolized how Greece’s far-left government had become very much alone politically, analysts said, and how its promise to roll back the German-led policies of economic austerity had encountered an unexpectedly unified European opposition.

“There was a window of opportunity to change course,” said Paul De Grauwe, a professor at the London School of Economics and Political Science who is a critic of austerity. “But somehow the northern view — of Germany, Holland and Finland — has prevailed. Why was this? That is where the power is. The power of the purse.”

After months of slogging negotiations, some sort of deal must be struck by the end of June — the bailout program for Greece ends on the 30th — but how it will end remains unclear. The impasse is rooted in the refusal of Greece’s creditors — the International Monetary Fund, the European Central Bank and the European Commission — to release a final installment of bailout funds — 7.2 billion euros, or about $8 billion — without an agreement from Athens on budget cuts and economic changes.

Martin Wolf wrote for the Financial Times that the impending default is causing a run on the banks:

Greece is now on the brink of default. It owes €1.5bn to the International Monetary Fund this month; another €452m to the IMF and €3.5bn to the European Central Bank next month; and a further €176m to the IMF and €3.2bn to the ECB in August. Without a deal with the rest of the eurozone to release €7.2bn in the remaining funds from its bailout agreement, Athens will be forced to default. It has no other source of money. Its access to markets is closed.

If a deal with the eurozone is not reached, Greece will default. The ECB would then reconsider the acceptability of claims on the government (be they direct liabilities or guarantees) as collateral for its lending to banks. Haircuts would certainly be raised sharply. The ECB would find it particularly hard to lend against collateral supplied by a government that has defaulted to itself. The knowledge that default is imminent has already accelerated a run on the Greek banks. Without a deal, therefore, banks will soon be forced to halt withdrawals.

The mood music coming from those engaged in these discussions is highly discordant. Alexis Tsipras, Greek prime minister, has accused bailout monitors of making “absurd” demands. On the other side are those equally determined not to grant concessions, foremost among them governments of member countries that have stuck to harsh commitments or are poorer than Greece. Meanwhile on the sidelines Jack Lew, US Treasury secretary, is reduced to pleading for flexibility, terrified of the consequences of another upset.

The one bright spot is that there is flexibility in when a default could be declared, Alen Mattich wrote for The Wall Street Journal:

There is, however, a certain amount of flexibility.

There’s flexibility around just when the IMF would declare the loan in default. The process is outlined in the IMF’s 2014 guide to its Financial Operations.

Once the deadline passed, the relevant IMF executive director responsible for Greece would make contact with the Syriza government to urge prompt payment. At the same time, Greece wouldn’t be permitted to use any IMF resources or would any request be considered until the obligation is cleared.

If after two weeks the debt still hasn’t been repaid, IMF’s management make a direct appeal to Greek finance minister Yanis Varoufakis or his alternate, Yannis Stournaras, making it clear how serious the situation is.

The Reuters story Jan Strupczewski and Renee Maltezou said the Greek leader had little room for negotiation:

Tsipras, who has vowed not to surrender to more austerity, tried to pre-empt a take-it-or-leave-it offer by the creditors, sending what he called a comprehensive reform proposal to Brussels on Monday before they could complete their version.

Euro zone officials branded the Greek text insufficient and said it was not formally on the table.

The Greek leader faces a backlash from his own supporters if he has to accept cuts in pensions and job protection to avert a default and keep Greece in the euro zone.

Despite defiant rhetoric and face-saving efforts, he seems likely to have to swallow painful pension and labour reforms, facing the choice between putting them to parliament at the risk of a revolt in his Syriza party, or calling a snap referendum.

The world is watching, waiting and worrying about what’s going to happen. Markets are in turmoil and it looks like a default could actually happen. While it could take six months to unwind, which would give the markets time to react, it’s still scary to think about the potential outcome.