As Greek Prime Minister Alexis Tsipras follows an increasingly perilous financial path, his antagonists are just sitting tight.
Finance ministers from the euro region discuss in Riga on Friday where to go from here as talks on more rescue money for Greece enter a fourth month. Frustrated after fruitless calls on Tsipras to tackle his country’s problems, creditors can only withhold the support that would allow him to shield Greeks from financial reality while keeping the country in the currency.
“This is the next stage of the negotiation,” said James Nixon, chief European economist at Oxford Economics in London. “They’ll see how the political situation develops in Greece if they apply the thumbscrews.”
With money running out and no sign of an agreement, Tsipras is short of options as European leaders show his electoral promise to end austerity doesn’t stack up with their demands for more economic reforms to unlock vital funding. This week, he ordered municipalities to transfer their cash balances to the central bank as salaries and pensions come due.
The country owes more than 300 billion euros ($327 billion). It needs to service debt in coming weeks, starting with more than 600 million euros in interest payments in early May. Greece may soon have to issue government credit notes to pay pensions or impose capital controls to shore up the banking system and keep money in the country, according to Nixon.
The meeting of the euro-area finance ministers in the Latvian capital follows a European Union leaders summit in Brussels attended by Tsipras.
One thing he and his country’s creditors at least agree on is that the road doesn’t end with an exit from the euro.
“Grexits are not an option,” Lithuanian Finance Minister Rimantas Sadzius said as he entered Friday’s talks. “Also in Greece, support for the euro is at a record high.”
European Commission Vice President Valdis Dombrovskis said while there’s still much work to be done, the starting point is that the country will stay in the euro.
“There has to be a grown-up conversation about what’s going to happen to the level of debt,” James Bevan, chief investment officer at CCLA Investment Management, told Bloomberg Television. “It’s a completely different conversation to should Greece leave the euro.”
The Greek economic recovery that started last year has already started to unravel as the talks remain deadlocked. Gross domestic product shrank 0.4 percent in the fourth quarter. About 1 million Greek workers see delays of as long as five months in salary payments by their employers, the Ta Nea newspaper reported this week, citing Labor Ministry data.
Support for Tsipras’s confrontational negotiating strategy fell to 46 percent in a University of Macedonia poll for Skai TV published on Tuesday, compared with 56 percent a month earlier. Researchers interviewed 1,007 people between April 15 and 17 and the margin of error was three percentage points.
With talks over financial aid going round in circles, the European Central Bank is studying measures that would restrict emergency funding to Greek lenders. Such a move might force Greece to limit the amount of cash that Greeks withdraw from ATMs and would push the government closer to a default.
Every possibility, though, is being considered to keep Greece in the euro, a German government official said last week, asking not to be named because the discussions are private.
The German government is conscious that even with the release of 7 billion euros from the country’s second bailout, Greece will need more aid to avoid reneging on debt next year. Any deal now has to include improving the chances of keeping Tsipras in line over the long term.
Defaulting, issuing credit notes to pay bills or imposing capital controls could easily start a panic that could force the government’s hand and make euro exit unavoidable, according to Holger Schmieding, chief economist at Berenberg Bank in London.
With the euro area determined to out-wait the Athens government, and Tsipras insistent he won’t budge, Greek capacity for stomaching more hardship may be the limiting factor.
Deputy Prime Minister Yannis Dragasakis said in an April 18 interview with To Vima newspaper the government could call a snap election or a referendum as a means of breaking the impasse if it fails to persuade the euro area to release more aid money. At that point, euro exit may really be the choice facing voters.
“At some point, the heads of government will probably tell Tsipras, you have a week to decide,” Schmieding said in telephone interview. “But we’re not close to that yet.”