Merkel Expects Greek Funding Talks to Drag On for Months

How Much Pressure Does Merkel Face from Greece?

Germany expects talks with Greece to drag on until after the current round of bailout funding runs out at the end of the month and is prepared to play a waiting game until April or May, when the country approaches a cash crunch, a person familiar with the matter said.

Greece would not immediately go bankrupt at the end of February because it has resources to last beyond that point and Germany is ready to hold off until there is a more urgent need to strengthen its bargaining position, said the person, who asked not to be identified discussing internal talks.

Chancellor Angela Merkel, who is still assessing Prime Minister Alexis Tsipras’s motives, is taking a tough approach with the new premier and wants to avoid being drawn into a duel with him, another official said. No one from the chancellery has met with him yet.

Greece is already backing down from earlier demands, retreating Monday from its call on the euro area to write down its debt, and instead proposed to exchange existing borrowings for new bonds linked to the country’s growth. The proposal marks a change of course for Tsipras, who bowed to virtually unanimous opposition just a week after he took office.

“The Greek government is still working on its position,” Merkel said today in Berlin, declining to comment on specific proposals. “That’s more than understandable considering the government has been in office for a few days. We’re waiting for recommendations and then we’ll go into talks.”

Avoiding Haircut

Greek stocks and bonds surged after Finance Minister Yanis Varoufakis outlined plans late Monday to swap some debt owned by the European Central Bank and the European Financial Stability Facility for new securities. Speaking to about 100 financiers in London, Varoufakis indicated that the move would allow Greece to avoid imposing a formal haircut on creditors, according to a person who attended the meeting and asked not to be identified because they weren’t authorized to speak publicly.

“Debt will be rendered sustainable, even if we replace haircut with euphemisms and swaps,” Varoufakis tweeted from his personal account. “No U-turn!”

Tsipras and Varoufakis, whose Syriza party won elections last month on a pledge of ending European Union-backed austerity policies, are seeking allies. They were in Rome on Tuesday. Tsipras is next scheduled to visit Brussels and Paris. Varoufakis will go to Frankfurt to meet ECB President Mario Draghi tomorrow and then Berlin to see his German counterpart, Wolfgang Schaeuble.

“The conditions are there to arrive at an accord between EU institutions and Greek authorities,” Italian Premier Matteo Renzi said at a joint press conference with Tsipras.

Bridge Deal

A six-week bridge agreement starting at the end of the month could provide room for a more comprehensive accord in June, Varoufakis told Ansa newswire.

“There are new proposals and new reports coming out of Greece all the time and all of Europe and beyond seems to be holding its breath,” Volker Kauder, caucus leader for Merkel’s Christian Democratic-led bloc in the German parliament, said. “The new Greek government doesn’t create any trust this way.”

Germany has led the EU’s demands for budget cuts in the countries, like Greece, that received bailouts. Merkel has signaled that she won’t give in to earlier Greek demands for a writedown, and officials in Paris and Madrid have also rejected the possibility.

Tsipras’s retreat from his call for a debt reduction may shift attention to the second front in his conflict with euro-area leaders: his desire to increase spending and roll back austerity.

Reality Bites

The 40-year-old premier has promised to raise wages and pensions, end public-sector firings and stop asset sales -- all policies that would breach the conditions of the bailout aid.

“Reality is about to bite: Tsipras will realize that the constraints are very tight,” Kevin Featherstone, professor of contemporary Greek studies at the London School of Economics, said in an e-mail. “It seems certain that the euro zone will insist on Greece committing itself to continued structural reform.”

Merkel’s room for immediate maneuver is also limited. She is preparing for state elections in Hamburg in February and in Bremen in May and fending off challenges from anti-euro party Alternative for Germany. According to a poll by the Emnid research institute published Feb. 1 in Bild am Sonntag, 68 percent of Germans are against a haircut for Greece, with only 21 percent in favor of such a move.

First Encounter

Merkel, who will probably see Tsipras for the first time at a European Union summit in Brussels on February 12, isn’t planning a one-on-one meeting with him at the gathering, government spokesperson Christina Wirtz said on Monday.

While holding the line on a debt writedown, Germany is willing to consider giving Greece more time to meet its obligations, and negotiations with international creditors may shift to allow a more distant role for the International Monetary Fund, a German official said Monday. The IMF, ECB and European Commission make up the so-called troika keeping tabs on how the country is proceeding with its aid program.

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