European leaders talked openly about a Greek exit from the euro ahead of a weekend summit on the country’s economic future, breaking dramatically with years of denial about the possibility.
Europe has “a Grexit scenario prepared in detail,” European Commission President Jean-Claude Juncker said late Tuesday night, hours before Austrian Chancellor Werner Faymann said Greece’s Plan B is “another currency.” The European Union set a Sunday deadline to reach a deal with Greece on a rescue in exchange for austerity measures and economic reforms, while the country formally requested a new three-year bailout and promised to pay back its debts.
The continent’s most indebted country is closer than ever to being forced to abandon the euro after its people voted decisively in a July 5 referendum to reject spending cuts and tax hikes. Greece’s banks are almost out of cash and its economy is grinding to a halt after Prime Minister Alexis Tsipras imposed capital controls to stem withdrawals, and could collapse entirely without a new lifeline from the European Central Bank.
“Our inability to find agreement may lead to the bankruptcy of Greece and the insolvency of its banking system,” said EU President Donald Tusk. Failing to find a deal “will mean the end of the negotiations with all the possible consequences, including the worst-case scenario where everyone will lose,” he said.
Market reaction to the turmoil was muted. The euro climbed 0.4 percent to $1.1057 and the benchmark Stoxx 600 index rose 0.3 percent as of 3:40 p.m. in Brussels. Greek bonds dropped for a fourth day, although Italian and Spanish debt extended a rally amid hopes Greece would be able to reach a deal, or that the ECB would act to protect other markets from any fallout.
Sunday’s Brussels meeting now looms as the climax of a five-year battle to contain Greece’s debts, potentially splintering a currency that was meant to last and throwing more than half a century of European economic and political integration into reverse. German Chancellor Angela Merkel, whose country is Greece’s largest foreign creditor, said she is “not especially optimistic” about finding a solution.
Tsipras was in Strasbourg Wednesday as part of his last-ditch campaign to keep Greece in the euro.
His government extended capital controls and bank closures through Friday as it sent a formal request for a new bailout to the European Stability Mechanism, the body that co-ordinates financial assistance to member states. Greece asked for a three-year loan facility, said tax and pension reforms would be implemented starting next week, and pledged to honor all its financial obligations “in a full and timely manner.”
The letter, signed by new finance minister Euclid Tsakalotos, was more conciliatory than the previous Greek request, which asked explicitly for debt relief and didn’t commit to reforms. Today’s document supersedes the earlier one.
“The Greek people didn’t deliver a mandate for rupture; they reinforced the mandate for a lasting and just solution,” Tsipras told the European Parliament. “My country was turned into a laboratory experiment of austerity. We have to admit that the experiment failed.”
The path to a euro exit by Greece is unclear. European law treats the euro as “irrevocable” and makes no provision for a country to leave or be pushed out. The likeliest exit mechanism would be for European governments to halt aid to Greece, leading the ECB to stop supplying euros to the country’s banks.
The ECB will end its support if “there is no political accord in sight,” governing council member Christian Noyer said Wednesday in an interview on Europe 1 radio. In that event, Greece would be forced to issue IOUs or some other medium of exchange, leading gradually to the creation of a parallel currency to replace scarce euros.
To avoid that outcome, by Friday Greece must spell out how it will make its economy more competitive and save money in the process. Proposals acceptable to European leaders will almost certainly require it to stomach many of the reforms that Tsipras has resisted since coming to power in January, and which Greeks repudiated in their referendum.
Expert assessment of that package would feed into a final set of meetings, culminating in summits of both euro-zone leaders and the broader 28-nation EU on Sunday.
“This is the big one,” Malcolm Barr, an economist at JPMorgan Chase & Co. in London, said in a report to clients. “The ‘good’ news for Greece is that it is being given a clear opportunity to put its proposals in a concrete form and have them evaluated.”
Tsipras will have few sympathizers at the summit. Germany, the Netherlands and Finland have anchored the tight-budget camp since the debt crisis broke out in 2010; Ireland and Portugal observed strict conditions to complete their own aid packages and are loath to see Greece get off more easily.
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Among large EU countries, only the government of France is striking a more dovish tone toward Greece. French President Francois Hollande has warned about the consequences of setting Greece adrift, and said his motto for handling the Greek crisis is “responsibility, solidarity, speed.”