Greece Aid Accord Looks Elusive as Tsipras Sticks to Red Lines

Bloomberg

by Paul TugwellChristos Ziotis

2:16 PM EEST

May 16, 2015

An agreement between Greece and its international creditors to unblock financing and avert a default looked elusive after Greek Prime Minister Alexis Tsipras said he won’t strike a deal at any cost.

“There’s no doubt that an agreement must be reached,” Tsipras said late Friday at a conference in Athens. “But those who think that the Greek side’s resistance can be tested or that its red lines will fade as time passes, would do well to forget it.”

Tsipras’s so-called red lines include no further cuts to state wages and pensions. More than 110 days of talks between Greece and its creditors have failed to produce an agreement to unlock further aid from the country’s 240 billion euro ($275 billion) bailout. The standoff has triggered a liquidity squeeze, pulling the country back into a recession and renewing doubts over Greece’s future in the euro area.

“The bottom line is that pressure on Greek authorities to come to a deal is rising,” JPMorgan Chase analysts Malcolm Barr and David Mackie wrote in a note to clients Friday. “The pressures on central government cash flow, pressures on the banking system and the political timetable are all converging on late May-early June. At that point, some form of interim deal will need to be struck” and “it’s clear that time is running out,” they said.

More Talks

Negotiations in the so-called Brussels Group of Greek and creditor institution representatives will continue through the weekend and into next week, a European Union official said, asking not to be named as the talks are private. The group includes the International Monetary Fund, the European Central Bank and the European Commission.

The Jan. 25 election gave the government “a clear mandate to change the policies of the memorandum that annihilated Greek society and brought it to the brink of despair,” Tsipras said. It’s this mandate from the Greek people that is the biggest stumbling block to a deal with the country’s creditors, Maltese Finance Minister Edward Scicluna said in an interview Friday.

Greece won’t agree to measures that aren’t acceptable to the government just to reach a deal with creditors, Finance Minister Yanis Varoufakis said in an interview with Skai TV broadcast Saturday.

The alternate health and social security minister, Dimitris Stratoulis, reiterated the government’s view in a separate interview Saturday with Skai TV. The Greek government doesn’t want an agreement with its creditors “just to have an agreement,” as “the agreement must serve the interests of the Greek people, the country and Europe,” he said.

End Game

Greece is convinced it can play by different rules from other countries in the 18-member euro area, and the situation around the talks is “not tenable,” ECB executive board member Yves Mersch told Luxembourg radio 100.7 on Saturday.

“We are in an end game,” Mersch said. “There has been an accord between Europe and Greece to go through a program. This hasn’t been the case since December last year, because the new government said it doesn’t want to have anything to do with the program. But then they can’t demand money that was attached to that program either.”

Tsipras will address the standoff in bailout negotiations on the sidelines of a meeting of EU leaders to be held May 21-22 in Riga, Latvia, according to a Greek government official who asked not to be identified as the diplomacy is not public.

Unacceptable Changes

While Greece has found common ground with its creditors in areas including fiscal targets, marginal changes to the sales tax rate, and tax administration reform, which “makes us optimistic that we are indeed close to an agreement,” there are “still open issues” concerning labor market and pension system reforms, Tsipras said.

Some among the creditors are insisting on proposals to change the institutional framework for the operation of an “already deregulated” labor market and these changes “can’t be accepted,” he said.

Greece wants an agreement that will end austerity, restore liquidity to the real economy and open growth prospects for the country. This implies agreeing on low primary surplus targets, on restructuring Greek debt, on implementing a strong investment program and on not cutting wages and pensions, Tsipras said.

Greece may seek an additional meeting of euro-area finance ministers by the end of May, Greek government spokesman Gabriel Sakellaridis said on May 14, as the cash crunch intensifies.

Rising Yields

The yield on Greek 10-year bonds closed 20.9 basis points higher on Friday at 10.76 percent. That yield climbed as high as 13.93 percent in April, the highest since December 2012, after dropping to as low as 5.52 percent in 2014. The benchmark Athens Stock Exchange General Index closed Friday 2.6 percent lower.

Credit-rating company DBRS downgraded Greece’s issuer rating to CCC from B on Friday, citing a “further increase in uncertainty over whether Greece and its creditors will reach an agreement on a program that restores macroeconomic stability and improves Greece’s cash position.” Fitch Ratings later in the day affirmed its CCC grade for Greece.

“I think a third deal is simply needed and there is no way around a third deal,” ING Germany Chief Economist Carsten Brzeski said in a Bloomberg Television interview Friday. “It’s either a third bailout package or it’s a Grexit, no matter how you look at it. I think that there is no in-between solution.”