Greek Prime Minister Alexis Tsipras was given hours to come up with a plan to keep his country in the euro and stave off economic disaster as citizens suffer under a second week of capital controls.
Adding to the pressure, the European Central Bank made it tougher for Greek banks to access emergency loans. German Chancellor Angela Merkel said “time is running out,” as she and French President Francois Hollande responded to Sunday’s referendum result in Greece. Euro-region finance ministers gather for an emergency meeting on Tuesday.
Tsipras has all but run out of chances to reach a deal with creditors, who have insisted on tax hikes and spending cuts as the price for a new bailout of Europe’s most indebted nation. Greece’s economy is grinding to a halt, with bank closures extended through Wednesday to stem deposit withdrawals.
“It will be important tomorrow that the Greek prime minister tells us how this should move forward,” Merkel said at the Elysee Palace in Paris. “The last offer that we made was a very generous one. On the other hand, Europe can only stand together, if each nation takes on its own responsibility.”
Just after Merkel and Hollande met, the ECB maintained its lifeline to Greek lenders at the prior level, the equivalent of a drip feed. Yet it also increased the haircuts on collateral pledged against emergency liquidity, raising the discount applied to reflect the dire economic situation.
The reaction of financial markets to the latest stage in the crisis was muted, suggesting its effects can be contained. The euro fell 0.6 percent to $1.1059 while the benchmark Stoxx Europe 600 Index dropped 1.2 percent to 378.68 points.
“The Greek government has to take a decision tonight, this evening, on what they’re going to do tomorrow, and whether they come with a serious story to the summit,” Dutch Prime Minister Mark Rutte said in The Hague.
Greece today made a pre-emptive concession to creditors with the resignation of outspoken Finance Minister Yanis Varoufakis, who had clashed repeatedly with his counterparts from other countries -- especially Germany’s Wolfgang Schaeuble.
His replacement, Euclid Tsakalotos, will likely prove less combative in style, although he shares his predecessor’s opposition to austerity measures and has a deep background in Tsipras’s Coalition of the Radical Left, or Syriza. Tsakalotos played a prominent role in the last round of debt talks, which ended abruptly on June 27 when Tsipras called the surprise referendum.
Tsipras can now claim a strong domestic mandate to negotiate after the plebiscite, in which 61 percent voted “no” to the latest creditor proposals. The endorsement came even after banks had been closed for a week, causing widespread queues at cash machines as Greeks waited to withdraw a daily maximum of 60 euros each.
“Tsipras’s margin of victory and Varoufakis’s resignation strengthens his hand in the upcoming negotiations,” said Marchel Alexandrovich, senior European economist at Jefferies Group. “Now it is up to Merkel and Hollande to decide whether to let Greece go, or to offer a better deal than was on the table 10 days ago.”
Unless it finds a solution to its cash crunch, Greece could drift toward an exit from the euro area -- an outcome that Tsipras and other European leaders say they want to avoid at all costs. Without funds to pay salaries and allow commerce to occur, the Greek government could eventually be forced to issue IOUs or some other medium of exchange, which might gradually evolve into a parallel currency.
“Time is running out and the window for a deal keeps narrowing,” Mujtaba Rahman, head of the Europe practice at Eurasia Group in London, wrote in a note to clients. “The euro leaders’ summit on Tuesday is likely to prove decisive for Greece’s euro membership.”