EU, Greece Pursue Quiet Diplomacy to Stave Off Default

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Greece Capital Controls Likely, Default Not Inevitable

European Union leaders and Greece’s creditors headed into a flurry of behind-the-scenes weekend diplomacy before high-level meetings to unlock aid for the nation flirting with default.

With markets closed, the weekend gives negotiators trying to avert a Greek exit from the euro some room to lay out a road map for what will be a high-stakes week with an emergency summit of EU chiefs on Monday. The clock is running down on a June 30 deadline to make payments and work out a new deal amid disagreements on pensions, sales tax and a deficit target.

German Chancellor Angela Merkel and her French counterpart, Francois Hollande, spoke by phone on Friday. As leaders of the two biggest economies in the 19-nation euro bloc, they’ve presented a united front against Greek Prime Minister Alexis Tsipras, who has spent his five months in power trying to roll back the austerity policies underpinning the country’s bailout.

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“I want to say very clearly on expectations, that the summit meeting on Monday can only be a decision-making summit if a basis for making decisions is there,” Merkel said at a Christian Democratic party event in Berlin.

Tsipras Trip Canceled

Greece is running out of last chances. The euro-area bailout expires at the end of the month and that’s when about 1.5 billion euros ($1.7 billion) is owed to the International Monetary Fund. With its finances in tatters, it’s unclear how long Greece can hold out against the conditions attached to a fresh infusion of rescue loans.

Greece’s negotiating team met on Saturday to discuss the bailout talks and the country’s cabinet will gather in the prime minister’s residence on Sunday morning. Tsipras on Saturday canceled a planned trip to Strasbourg on June 23, the day after the summit. No reason was given.

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Minister of State Nikos Pappas told Ethnos newspaper that the government “was working toward a solution.” He said Greece’s so called red-lines include no cuts to pension plans or wages, an end to austerity and a “comprehensive” response to the onerous debt load.

Breathing Space

European Union President Donald Tusk discussed what awaits Greece with European Central Bank chief Mario Draghi, IMF head Christine Lagarde and EU Commission President Jean-Claude Juncker. Those institutions control the purse strings.

Flying back from a visit to Russian President Vladimir Putin, Tsipras will hunker down in Athens with his closest advisers to come up with a game plan. His country was given a few more days of financial breathing space from the ECB, which Friday increased again the maximum amount of emergency funding Greek banks can access.

On Monday, the ECB will revisit that emergency funding as deposits continue to flee Greek banks at dizzying rates. About 1.85 billion euros was withdrawn in the last two days alone, according to a person familiar with the matter.

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“We are in the midst of great turbulence,” Tsipras said in St. Petersburg. “But we are a nation of seafarers, who know how to deal with storms, and aren’t afraid to sail to distant oceans, to uncharted waters, in search of a safe harbor.”

The 40-year-old leader, contending with hard-liners in his Syriza party who don’t want him to capitulate to creditors’ demands, has escalated the rhetoric in search of a better deal. He is expected to speak by phone with Juncker.

No Willingness

After their meeting on Thursday ended in frustration, European finance ministers will convene again Monday, before the summit of leaders that could determine the future of the euro zone and Greece’s place in it. Fatigue has set in and expectations have been tempered after months of brinkmanship and inconclusive discussions.

Greek Finance Minister Yanis Varoufakis, in an opinion piece published Saturday by The Irish Times, blamed his European counterparts for showing no willingness Thursday to consider his “well thought-out” proposals.

“Regrettably, my presentation was met with deafening silence,” Varoufakis wrote.

In an interview published in Brussels-based l’Echo newspaper, Varoufakis said he doesn’t want Greece to abandon the euro and is optimistic differences will be overcome. He also warned that the ruling Syriza party would be replaced by neo-Nazis if Greece ends up defaulting and leaving the euro.

It’s not yet clear if Tsipras will come to Brussels armed with a new plan, a Greek government official said. Near the end of the week, the same leaders will reconvene again for a scheduled two-day summit.

“We need to get rid of any illusions that there will be a magic solution at the leaders’ level,” Tusk said on Friday. “We are close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support or to head towards default.”

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