Greece Creditors Grim on Prospects of Deal

Government bond prices plummet as lenders voice dismay on lack of progress in talks

The Wall Street Journal

By MARCUS WALKER

April 16, 2015 10:56 p.m. ET

Greece’s international creditors signaled they are losing hope that Athens will do what is needed to unlock bailout funds before it runs out of money, and Greek government bond prices plunged as concerns rose about default and an exit from the eurozone.

The European Union’s executive arm, which helps oversee Greece’s bailout, said it is “not satisfied” with the slow progress in talks, while Christine Lagarde, the managing director of the International Monetary Fund, another key lender,said Greece needs to “get on with the work” of fixing its economy. Ms. Lagarde said Thursday she has warned Greece against postponing loan payments, a prospect people familiar with the matter said Athens informally explored.

Policy makers across the euro currency zone are bracing themselves for brinkmanship in coming weeks that could lead to a resolution—of one kind or another—but only in the face of further political and financial turmoil. “Greece is moving ever closer to the abyss,” Slovakia’s Finance Minister Peter Kazimir said this week.

With Germany’s powerful finance minister, Wolfgang Schäuble, warning that the impasse over Greece’s funding and economic strategy could drag into summer, yields on Greece’s bonds maturing in 2017 rose sharply on Thursday to more than 26%, signaling a very high risk of default. Investors said the sheer uncertainty surrounding Greece’s fate—including whether it will remain in the eurozone—is making it hard to price Greek debt at all.

“Liquidity is drying up in Greece,” Greek Finance Minister Yanis Varoufakis said Thursday in Washington. While expressing hopefulness that his government would conclude negotiations with its international creditors by the end of June, he said Athens is “not going to sign up to targets we know our economy cannot meet,” and would “compromise for a speedy agreement, but will not be compromised.”

Failure to reach agreement in coming weeks could lead to escalating financial and political turmoil in Greece, potentially taking the country to the imposition of capital controls and even to the brink of default.

A string of IMF loans to Athens fall due for repayment this spring, putting the country’s finances under strainfor as long as it lacks access to fresh bailout funds. Athens informally sounded out the IMF recently about postponing the loan repayments but was rebuffed, according to people familiar with the matter. So far, Greece has repaid all its IMF loans on time.

Ms. Lagarde said the fund’s board hasn’t approved a delay of payments for three decades and no advanced economy had ever officially requested such flexibility. “It’s clearly not a course of action that would actually fit or be recommendable,” she said.

Most analysts say they still expect Greece to climb down and agree to the economic policies that creditors are demanding in return for bailout aid. But many observers see a distinct possibility of Greece leaving the euro at some point, even if it isn’t the most likely scenario.

“The base case is still an agreement, but the limited constituency in Greece for implementing more austerity means there is a significant probability of euro exit in the next two years,” said Gabriel Sterne, head of global research at consultancy Oxford Economics. He puts the odds at more than one in three.

Italy’s finance minister on Thursday warned that Greece’s worsening cash crisis could push the country into an accidental exit from the eurozone as time runs out for Athens to reach a financing deal.

“Negotiations are difficult, liquidity is getting short, so under pressure it’s more likely that an accident can happen,” the finance minister, Pier Carlo Padoan, said in an interview.

Other eurozone governments say they have virtually given up on reaching a deal with Athens by late April, as they had hoped to. Greece’s government, led by the leftist Syriza party, staunchly opposes the fiscal austerity, welfare cutbacks and labor-market deregulation that Germany, the IMF and other lenders view as needed to make the Greek economy viable in the euro. Athens’s alternative proposals, centered on fighting corruption and tax evasion while strengthening the social safety net, aren’t seen by the creditors as adequate alternatives to a tough, market-oriented shake-up.

The ideological gulf between Syriza and its lenders is a major reason for the impasse, combined with Greek Prime Minister Alexis Tsipras’s reluctance to risk splitting his party by signing up to German-backed economic policies, European policy makers and analysts say.

Under an accord reached in February, Greece was supposed to draw up economic policies that satisfy technocrats from the IMF, European Central Bank, and the EU’s executive, the European Commission. Those policies would then be approved by eurozone finance ministers. “This sequence of events...has not yet materialized,” Commission spokesman Margaritis Schinas said on Thursday.

Senior officials in Athens have repeatedly briefed media that they might be unable to repay IMF loans unless Europe releases fresh funding. But policy makers in Berlin and other major capitals believe the Greek side is bluffing, because it can delay domestic public spending to avoid a debt default if it is short of cash. German officials believe Greece can probably stay afloat by delaying domestic spending until July, when it will need billions of euros in outside financing to repay bonds held by the ECB.

Greece’s government said on Thursday that it beat its budget targets in the first quarter of 2015, spending €1.74 billion ($1.9 billion) less than it raised in revenues, excluding the cost of servicing debt. The budget surplus was partly due to transfers from the EU budget, and partly due to lower-than-budgeted government spending. The cost of the latter is that Many suppliers to Greece’s public sector haven’t been paid lately, hurting Greek business and helping to push its economy back into recession after a fragile recovery last year.

—Ian Talley in Washington contributed to this article.

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