Greece has less than a week to strike a deal with its eurozone creditors to avoid defaulting on its massive debts and perhaps being kicked out of the single currency area, with German leaders and top European Union officials now conceding that default is the likeliest outcome.
Negotiations between the leftist government in Athens and its creditors are now at their lowest ebb since Alexis Tsipras became Greek prime minister in January.
Angela Merkel, the German chancellor, and Jean-Claude Juncker, the president of the European commission, said on Friday that talks with Greece would carry on ahead of next Thursday’s key meeting of eurozone finance ministers in Luxembourg. That meeting is now viewed as the deadline for a decision on Greece’s fate.
Merkel was said to have resigned herself to a Greek default, and at a meeting on Thursday night in Bratislava, eurocrats preparing for the Luxembourg talks included the default scenario in their discussions for the first time.
Until Friday EU executives have refused to countenance the prospect of default and the issue has not been discussed at any official level
Standard & Poor’s lowered the rating of Greece’s biggest four banks on Friday, two days after cutting its already deep-junk rating for Greek bonds.
Alpha Bank, Eurobank, the National Bank of Greece and Piraeus Bank saw their rating drop from CCC+ to CCC, S&P said in a statement.
“The downgrade reflects our view that Greek banks will likely default within the next 12 months in the absence of an agreement between the Greek government and its official creditors ,” the ratings agency said.
According to German media reports on Friday, Berlin has also begun contingency planning for Greek default scenarios. The plans were said to include the introduction of capital controls in Greece, closure of the banks, and the government’s issuing of IOUs to finance its public sector.
There is no exit plan for any country to leave the euro, but economists have suggested that such IOUs could then become a pseudo-currency, but they would circulate only within Greece. They would be impossible to use for international trade.
“The chancellor now knows that there is not enough time left,” one of Merkel’s aides told German mass-circulation newspaper Bild-Zeitung.
Jeroen Dijsselbloem, the Dutch finance minister who will chair next week’s Luxembourg meeting, delivered an ultimatum to Athens, warning it would be left “alone” if it did not meet the creditors’ terms for securing remaining bailout funds.
On Friday night, however, Greece was still refusing to back down. In a policy document leaked to the Greek press, the Tsipras government once again called for a debt restructuring and ruled out pension cuts or labour market reforms that would bring wage decreases.
It attacked the decision of the International Monetary Fund (IMF) to walk out of negotiations on Thursday – arguing that it represented pressure not on Greece, but on Germany. The IMF said the gap between the two sides was too wide and there had been no progress in talks.
While Juncker said that “technical” talks would continue – meaning negotiations between experts from both sides in the so-called Brussels Group – the Greek statement said the technical talks were over. Greece insisted that any further negotiations would only take place at a higher “political” level.
The current Greek bailout, with €7.2bn remaining to be disbursed, expires on 30 June unless an extension can be agreed. An extension would come with the same strings attached that Greece has so far rejected.
Greece has to repay the IMF €1.6bn by that date. It also has to redeem bonds at the European Central Bank to the tune of €6.7bn next month and in August. It also has a €1.7bn a month bill to pay for civil servants’ salaries and pensions.
Without a last-gasp breakthrough – of which there is no sign – Greece will be unable to make those payments.
“It’s foremost in the Greeks’ interests to get that agreement. The way things are now, it’s not going anywhere,” said Dijsselbloem. “If the Greek government can’t accept the fact that there are no easy solutions and that the difficult decisions just must be made, it is alone. We can’t help Greece if Greece doesn’t want to help itself … They have to come with serious proposals.”
The negotiations have gone from bad to worse in the past 10 days and are now at stalemate. Tsipras refuses to table proposals which would satisfy his creditors by agreeing to pension cuts and tax increases and is insisting on a form of debt writedown, which is anathema to the Germans.
The eurozone, in turn, has reverted to the pre-Tsipras crisis practices over the past five years of serving up ultimatums and policy diktats to the Greeks.
As if anticipating a blame game in the event of a Greek default, senior German officials told Bild: “No one will be able to say we didn’t try our utmost.”
But Juncker said on Friday that there would be more “technical” talks with the Greeks and then “political” negotiations. Repeating her mantra of recent weeks on Greece and on Britain in Europe, Merkel said: “Where there’s a will, there’s a way … It’s right that we keep talking.”
If there was any chance of saving the situation, Tsipras would have to make concessions, according to eurozone leaders.
“They can come with alternatives but then they have to be proper,” said Dijsselbloem. “As long as we don’t have those, it’s going to be very difficult.”