Greece Remains Defiant as It Seeks Deal With Creditors This Week

by Paul TugwellRebecca Christie

4:09 PM EEST

May 17, 2015

Bloomberg

Greece’s government said it won’t back down on election pledges to end austerity even while seeking to agree on a deal with creditors as soon as this week to unblock financing and avert a default.

“We’re striving for a mutually beneficial agreement by Friday,” Nikos Filis, spokesman for the parliamentary group of Prime Minister Alexis Tsipras’s Syriza party said Sunday in comments broadcast on Mega TV. “Our mandate from the Greek people is to reach an agreement where we stay in the euro area without harsh austerity measures,” he said, adding that “tough negotiations” will take place before a summit meeting of European Union leaders in Riga, Latvia, on May 21-22.

Tsipras’s so-called red lines include no further cuts to wages and pensions. More than 110 days of talks between Greece and its creditors have failed to produce an agreement to unlock additional aid from a 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.

Greece’s financial situation is serious, and the country can only obtain another tranche of aid upon completing the next stage of its reform program, European Union Vice President Valdis Dombrovskis said Saturday in an interview with Germany’s Bild newspaper. Greece still hasn’t submitted its reform list, he said.

Reform Referendum

Greece won’t accept “take-it-or-leave-it” proposals, and the issue of a national referendum on reforms “will depend on whether the creditors impose an ultimatum,” Syriza’s Filis said.

A Greek referendum might speed up the decision process on moving forward, German Vice Chancellor Sigmar Gabriel said Sunday in an interview published in Bild am Sonntag. A “third aid package for Athens is only possible if reforms are also implemented,” he said. A Greek exit from the euro would pose a political challenge and not an economic one, but “no one would have trust anymore in Europe if, in the first big crisis,” a currency member quits, he said.

Negotiations in the so-called Brussels Group of Greek and creditor institution representatives will continue this week, an EU official said, asking not to be identified as the talks are private. The group includes the International Monetary Fund, the European Central Bank and the European Commission.

‘End Game’

Greece is convinced it can play by different rules from other countries in the 19-member euro area, and the situation around the talks is “not tenable,” Yves Mersch, an ECB executive board member, told Luxembourg radio 100.7 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.”

An agreement must be reached, Tsipras said Friday. “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,” he said.

Greece wants an agreement that will end austerity, restore liquidity and promote growth. This implies agreeing on low primary surplus targets, restructuring Greek debt, implementing a strong investment program and shielding wages and pensions from cuts, Tsipras said. “There can be an agreement based on these four issues,” Filis said.

Pressure ‘Rising’

Tsipras will address the standoff at the EU leaders’ meeting in Riga, according to a Greek government official who asked not to be identified as the diplomacy is not public.

Any attempt to go over the head of German Finance Minister Wolfgang Schauble to Chancellor Angela Merkel is unlikely to succeed, JPMorgan Chase analysts Malcolm Barr and David Mackie wrote in a client note Friday.

“The bottom line is that pressure on Greek authorities to come to a deal is rising” as pressures on government cash flow and the banking system are converging with the political timetable on late May and early June, they said. “It’s clear that time is running out.”

The ECB’s governing council will meet May 20 in Frankfurt to review the liquidity of Greek banks and the discount the ECB applies to collateral they pledge in exchange for emergency assistance.

Tsipras Letter

Greece won’t be able to make repayments to the IMF, beginning with a June 5 payment, unless an agreement is reached with international partners before then, the U.K.’s Channel 4 reported Saturday, citing a leaked memo from the Washington-based fund dated May 14.

Tsipras sent a letter May 8 to EU Commission President Jean-Claude Juncker, IMF head Christine Lagarde, and ECB President Mario Draghi, saying that Greece wouldn’t be able to pay around 750 million euros due to the IMF on May 12 without financing, Athens-based Kathimerini newspaper reported Saturday. The Greek government only decided to pay the tranche on May 9, after it confirmed it could use SDR holdings account reserves, according to the report.

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 2.6 percent lower on Friday.

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.

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