Out of Options and Time, Tsipras Faces Greece’s Moment of Truth

by Ben SillsFlavia Krause-Jackson

June 15, 2015 — 11:30 AM EEST

Bloomberg

Greek Prime Minister Alexis Tsipras has four days to capitulate to demands to keep Greece in the euro -- or prepare for a messy divorce.

The collapse of talks in Brussels on Sunday has made Thursday’s meeting of euro-area finance ministers the next deadline in the saga that opened in 2009. Bills are piling up and the aid spigot, shut for 10 months, is about to be withdrawn.

“This week is deal week,” Mujtaba Rahman, head of euro zone analysis at Eurasia Group in London.

So what happens if the gathering in Luxembourg is a bust?

Once the prospect of a successful negotiation fades so do the odds of Greece paying the $1.7 billion it owes the International Monetary Fund this month. A default makes it difficult for the European Central Bank to keep Greece’s banking system afloat. The ECB, which will discuss the future of its emergency liquidity on Wednesday, is unlikely to cut it off completely until the bailout agreement expires on June 30.

Without the ECB’s largesse, Tsipras may need to impose capital controls to keep hard currency in the country as savers empty out their bank accounts in droves.

Capital Controls

There is a 60 percent chance that Greece will skip out on its IMF payment, the ECB will turn off its tap and Tsipras will be forced to take extraordinary measures to stop funds fleeing the country, according Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.

“It is increasingly clear that Tsipras is not a leader that the euro area can ‘do business with’ and hence there are no longer any political gains for the euro area in trying to coax him towards the political center,” he said.

Tsipras has by turns lashed out at his creditors, accusing them of setting “absurd” conditions. At other times, he’s played nice. By adopting that see-saw approach, he’s pushed back Greece’s day of reckoning to now.

The IMF insists that Greece cut pensions further and raise sales tax to meet a primary budget surplus of 1 percent this year. Tsipras insists pensions are off-limits -- predecessors who dared touch this sacred cow were booted out of office.

His government wants a more lenient fiscal target. Yanis Varoufakis, his finance minister and resident game theorist, has been unyielding in calls for debt relief.

German Impatience

Unless Tsipras changes his tune, German officials, including Chancellor Angela Merkel’s deputy, have indicated a willingness to let the Mediterranean nation take its chances outside the 19-member currency union.

‘We will not let the German workers and their families pay for the overblown election promises of a partially communist government,’’ Vice-Chancellor Sigmar Gabriel wrote in a Bild opinion column on Monday.

At this point the best Tsipras can hope for is “a few face-saving changes in details on the way,” Holger Schmieding, chief economist at Berenberg, said in a note to clients.

Then again, all the fireworks may just be stagecraft.

“A late-night deal could soon be possible,” HSBC Holdings Plc strategist Chris Attfield wrote on Monday.

And Merkel has kept her cool when many of her compatriots haven’t. “Where there’s a will, there’s a way,” she said June 11 before the weekend debacle. Even with voters happy to see Greece crash out of the euro, the winner of three consecutive elections has her own legacy to consider.

After all, Merkel “does not want to go down in history as the Chancellor that lost Greece,” Rahman wrote to his clients.

For related news and information: Greece Enters Fateful Week as Brussels Talks End Fruitlessly