Five Years After First Bailout, Greece Back on the Brink

Athens and its creditors reach another impasse, with time running out to avoid bankruptcy

The Wall Street Journal

By MARCUS WALKER and  NEKTARIA STAMOULI

May 1, 2015 2:20 p.m. ET

ATHENS—Five years into the biggest bailout of a debtor in history, Greece is closer to the brink than ever, with time running out to avert a bankruptcy that could destabilize not only the eurozone, but the global economy as well.

When Europe and the International Monetary Fund first agreed to bail Greece out on May 2, 2010, the plan was to return Greece to growth and bond markets within three years.

Instead, after half a decade and €245 billion ($274 billion) in promised loans, the two sides have reached an impasse. Although Greece has come close to financial meltdown before, the ideological divide has never been deeper.

The government’s refusal to inflict on an exhausted society the further belt-tightening that creditors insist is needed has created a deadlock that has frozen Greece’s funding and emptied its coffers.

The confrontation is the most dramatic sign of how the euro—intended to deepen European unity—has instead fostered political divisions between the Continent’s creditor and debtor countries, and between its voters and political establishments.

Countries that are only beginning to recover from Europe’s long economic slump since 2008 continue to chafe at the German-inspired austerity that European Union authorities seek to enforce.

Voters in many countries are turning their backs on mainstream parties in favor of radical, populist or nationalist movements that blame the euro and the EU for years of hardship and high unemployment. Greece’s radical-left Syriza party is the first to win power, promising a rebellion against Europe’s economic orthodoxy.

In recent days, however, both sides have intensified their efforts to bridge the gap.

A top European Central Bank official, Benoit Coeuré, has told eurozone governments that the ECB might allow Greek banks to buy more short-term Greek government debt—easing Athens’s cash crunch—if a broader deal is imminent, according to people familiar with Mr. Coeuré comments, which were made at a meeting of eurozone finance officials in Brussels late Wednesday. An ECB spokesman declined to comment.

Meanwhile Greece this past week sidelined some combative officials from the negotiations, including outspoken Finance Minister Yanis Varoufakis, as it tries to mend an atmosphere of mistrust.

But deep ideological differences and clashing political constraints in Greece and its eurozone partners, led by Germany, pose formidable challenges for the twin deals needed to keep Greece afloat: completing the current bailout program and adopting a new one.

The Greek economy can’t recover amid such uncertainty, but the creditors’ tough terms, including cuts to pensions and labor protections, are unacceptable, Greece’s Labor Minister Panos Skourletis said in an interview. “These are issues linked with our identity and our values,” he said. “It would be a strategic mistake if we took a step back on those and would lead to more retreats.”

Yet German Chancellor Angela Merkel can’t sell more aid for Greece to her increasingly skeptical voters unless Athens abides by the principle she established back in 2010: aid only in return for a comprehensive overhaul of the dysfunctional Greek economy.

Without fresh aid, Greece faces default on its international debts in July, when heavy bond repayments loom, if not sooner. Eurozone governments have set a deadline of June 30, when the current bailout expires, to achieve agreement on both deals.

Greece’s government said Thursday it is optimistic about an agreement before eurozone finance ministers meet on May 11. Officials elsewhere in Europe say some progress is the best that can be hoped for by then.

Germany and others insist the medicine prescribed in the original bailout memorandum was and remains correct, but the Greek patient didn’t take it properly.

Greece’s Syriza-led government, elected in January, believes the country was forced to swallow an overdose of austerity, which eventually reduced its budget deficit, but at the cost of a depression that has undermined the main goal: to return Greece to solvency and to the bond markets.

“The memorandum’s aim was to cure Greece’s debt crisis and the long-standing problems of its economy. Five years later we can say with safety that it has totally failed on both,” said the Greek government’s spokesman Gabriel Sakellaridis.

Failure to agree on terms for fresh aid could force Greece to return to a national currency, although it might also try to stay in the euro while imposing economically crippling capital controls.

The U.S. and others beyond Europe worry that a Greek exit from the euro could trigger shock waves in financial markets, hurting global economic growth. Some U.S. policy makers fear their European counterparts are dangerously complacent about the unpredictable fallout.

Ms. Merkel—who as leader of Europe’s economic powerhouse holds the crucial veto over loans for Greece—doesn’t want to go down as the chancellor who split the eurozone, jeopardizing the project of European integration that has been vital to postwar Germany’s identity, and to its acceptance by its neighbors, people familiar with her thinking say.

She also fears a damaging political rift within the EU just as it faces a serious challenge from Russia to Europe’s post-Cold War order, in the form of the Moscow-backed separatist war in Ukraine.

In a string of recent meetings and phone calls with Greek Prime Minister Alexis Tsipras, Ms. Merkel has pressed him to implement at least some of the measures demanded by the eurozone and IMF to unlock some of Athens’s frozen funding.

Mr. Tsipras is reluctant to give ground on the most contentious measures—pensions, labor-market deregulation, mortgage foreclosures—that could split his Syriza party and enrage its voters.

The 40-year-old premier was elected on a pledge to stop and reverse the heavy austerity. He is now openly considering a referendum if Europe and the IMF insist on terms that Syriza can’t swallow.

“If I end up having an agreement that puts me outside the limits” of Syriza’s core promise to end austerity, “I will have no other resort,” Mr. Tsipras said in a Greek television interview this past week. “The people will decide.”

Syriza’s hard-liners would accuse Mr. Tsipras of being a traitor if he caves in, said Yiannis Papanikolaou, an economic adviser to the centrist opposition party To Potami (Greek for “The River”).

“A referendum at this point would make sense, because it would give him the opportunity to move ahead with the reforms,” Mr. Papanikolaou said. “It could actually prove to be the only solution for Greece.”

Many analysts believe the uncertain outcome of a referendum—or new parliamentary election—could accelerate the steady outflow of deposits from Greek banks, sparking a full-blown bank run that forces Greece to impose capital controls. The time needed for a referendum campaign could also push Greece’s decision close to its deadlines in late June, when the current bailout expires, and July, when heavy bond repayments loom.

Opinion polls show Greeks overwhelmingly want to stay in the euro and want Mr. Tsipras to reach agreement with the creditors.

A survey published on Wednesday showed that 54% would back a deal that brings further austerity measures, while 37% would prefer default and a rupture with Europe. Many others are struggling to decide.

“Our creditors are monsters. They want to get everything,” said Despina Preveredou, a retired doctor from Athens who voted for Syriza. Like many of the party’s supporters, she said she wants to see Mr. Tsipras stand his ground and resist harsh measures—and has full faith that he will.

—Gabriele Steinhauser in Brussels contributed to this article.

Write to Marcus Walker at marcus.walker@wsj.com and Nektaria Stamouli at nektaria.stamouli@wsj.com