Greece’s Creditors Draft Final Offer for Bailout Aid in Bid to Break Stalemate

European officials say plan amounts to a take-it-or-leave-it offer to unlock much-needed aid for Athens

The Wall Street Journal

By MARCUS WALKER

Updated June 2, 2015 4:39 p.m. ET

ATHENS—Greece’s international creditors are poised to present the country with the outlines of a bailout deal that amounts to a take-it-or-leave-it offer, a move aimed at breaking a monthslong stalemate but which risks a political backlash and even a government collapse in Athens.

The plan marks a sharp shift in tactics by Germany, the IMF and other Greek creditors, who have lost patience with what they see as months of fruitless dialogue with the Athens government. Lenders drafted the proposed deal after key leaders, including German Chancellor Angela Merkel, met in Berlin late Monday to overcome their own divisions on how to keep Greece from bankruptcy and an exit from the euro.

European officials say Greek officials, which are expected to be shown the creditors’ proposal Wednesday, will now be asked to accept the terms with, at most, minor changes. Greek Premier Alexis Tsipras is slated to visit European Commission head Jean-Claude Juncker the same day in Brussels, where the lenders’ demands as well as Greece’s conflicting ideas are likely to be discussed.

Greece, fast running out of cash, likely needs some sort of help by mid-June to repay a series of IMF loans falling due. The country is believed to have enough cash to repay a €300 million ($327 million) payment due to the IMF on Friday. But European officials say Athens probably can’t meet further IMF repayments in June totaling about €1.25 billion unless it gets fresh financing in some form. Without a large subsequent cash injection from lenders, Greece faces a debt default in late July that could ultimately push the country out of the euro.

But the policy conditions in the creditors’ proposal—whose details remained under wraps but include fiscal austerity, privatizations, and overhauls of pensions and labor law—could prove extremely challenging for Mr. Tsipras to accept without sparking a rebellion within his ruling coalition.

European policy makers are trying hard to avoid the appearance of an ultimatum to Greece, knowing that this would make an already-difficult deal even harder for Athens to swallow. Most European officials were tight-lipped about the lenders’ latest initiative. But some officials admitted Tuesday that the move amounted to a take-it-or-leave-it offer to Greece.

Led by the German chancellery, creditors have been moving toward this tactic over the past two weeks, after growing frustrated with the lack of progress in negotiations with Greek officials aimed at a compromise.

Lenders now hope that Mr. Tsipras can be pressed to accept the creditors’ outline of a deal by the end of this week—allowing lower-level officials to complete the details next week, European officials say. That would allow the European Central Bank to make more liquidity available to Greek banks, allowing them to buy more short-term debt from the Greek government and relieving some of the immediate financial pressure.

Mr. Tsipras faces particularly tough days and weeks ahead since Monday night’s summit in Berlin resulted in a consensus among creditors that leaves Greece will little scope to fulfill Syriza’s election promises.

Greek officials had until now often cited disagreements among the creditors themselves as a big reason for the deadlock in bailout negotiations. But in Berlin, the IMF and the eurozone bridged their differences by agreeing that Athens must be made to enact comprehensive economic overhauls, as the IMF wanted—yet that there would be no explicit commitment, for now, to forgive some of Greece’s debt. Germany and other eurozone governments have strongly resisted IMF pressure to offer Greece debt relief that would impose losses on other European taxpayers.

The combination of tough economic measures and a delay to any potential debt relief could test the unity of Mr. Tsipras’s governing coalition. With a majority of only 12 in Greece’s 300-seat parliament, even a small rebellion by some of Syriza’s hard-line left factions could deprive Mr. Tsipras of crucial support, forcing him to rely on opposition votes and potentially triggering elections or a referendum. Some Syriza lawmakers are already calling for new elections rather than what they see as surrender to creditors’ terms.

“In terms of packaging this deal, Tsipras doesn’t have any easy way to sell it to his party,” said Wolf Piccoli, director of research at political risk consultancy Teneo Intelligence. “If Tsipras feels he might lose his parliamentary majority, he might pass the vote to the public.”

The proposed deal would complete Greece’s current bailout program with its eurozone partners, a process that some officials say could extend over this summer. By fall, officials say, Greece will need a new bailout package that keeps the country afloat until it is able to access international bond markets again—which many economists say could take years.

Ms. Merkel and other eurozone leaders are eager to avoid a default by Greece on its debt that could lead to the country tumbling out of the euro. But Ms. Merkel needs Mr. Tsipras to accept tough fiscal discipline and broader economic overhauls if she is to sell further aid loans for Greece to a German parliament and public that is increasingly skeptical about Greece’s willingness to make its economy as lean and competitive as euro membership requires.

Ever since Greece’s international bailout began in 2010, Ms. Merkel has made the IMF the arbiter of whether Greece is enacting enough austerity and overhauls to deserve aid loans. The IMF remains Germany’s ally on Greek overhauls, in the face of reluctance elsewhere in Europe—including at the Brussels-based European Commission—to impose drastic and politically difficult policy overhauls on Athens. But the Washington-based fund has clashed with Berlin over Greek’s huge debt.

The IMF insists Greece can be rendered solvent only through either far-reaching economic overhauls, or through debt forgiveness. Germany has so far staunchly rejected writing off its aid loans to Greece.

Late on Monday, the creditors overcame their differences by agreeing that Greece must enact comprehensive overhauls to earn fresh financing, while the IMF softened its insistence that Europe offer explicit commitments on debt relief.

Greece’s high debt remains a contentious issue in the background between the IMF and Europe, but isn’t holding up the creditors’ proposal to Greece. IMF head Christine Lagarde warned in Berlin that debt restructuring will become necessary if Greece doesn’t enact thorough economic overhauls that improve its budget balance and lift its growth trajectory, people familiar with the meeting said.

In a show of defiance, Mr. Tsipras told reporters that Athens has submitted its own proposed terms for a deal to European institutions and the IMF. Mr. Tsipras said he was optimistic that Greece’s proposal would be accepted. But European officials said that Greece’s own proposals remain insufficiently comprehensive or specific—a problem that has frustrated creditors for weeks, and that led to this week’s take-it-or-leave-it initiative.

Mr. Tsipras said he believes European leaders will be “realistic” and accept the Greek counterproposal. “The decision now lies with the political leadership in Europe [to reach an agreement],” Mr. Tsipras said. “We don’t expect any other plan to be submitted; Greece is the one submitting the plan,” the Greek premier said.

Greece’s government has nearly run out of money to continue servicing its foreign debts while also paying its bills at home. Rising outflows of deposits from Greek banks are putting added pressure on Mr. Tsipras to sign a deal.

The ECB on Tuesday increased the amount of liquidity that Greek banks can borrow under an emergency liquidity program to €80.7 billion ($89 billion) from €80.2 billion previously, according to a Greek bank official. The increase preserves the financial buffer that Greek banks have to cope with steady deposit outflows, which reflect months of uncertainty over Greece’s bailout.

Syriza’s parliamentary spokesman Nikos Filis said on local television that Greece won’t accept an ultimatum from creditors, and that Greece’s government cannot sign an agreement that is incompatible with the party’s antiausterity program.

“If we are talking about an ultimatum…which isn’t within the framework of the popular mandate, it is obvious that the government cannot co-sign and accept it,” Mr. Filis said. Mr. Filis said that if 12 or more Syriza lawmakers vote against the proposed deal, wiping out the ruling coalition’s majority, then Greece should hold new elections.

—Nektaria Stamouli contributed to this article.

Write to Marcus Walker at marcus.walker@wsj.com