Greece is working against the clock on a package of proposed reforms to convince European leaders headed by German Chancellor Angela Merkel that it can keep the euro.
The government on Wednesday extended capital controls by one business day, saying banks will now stay shut through Monday. Prime Minister Alexis Tsipras has until midnight Thursday to present his European colleagues with plans for economic reforms and spending cuts, in exchange for a new European bailout. Merkel is willing to let Greece go if Germany doesn’t consider the plans credible, according to two government officials familiar with her strategy, who asked not to be identified discussing private deliberations.
The continent’s most indebted country has never been closer to leaving the currency after more than half-a-dozen European leaders made clear that it has one last chance to present a sound plan. A failure to reach a deal could result in the European Central Bank cutting off funds to Greek banks, forcing the country to issue IOUs or some other medium of exchange to prevent economic collapse, gradually creating a parallel currency to replace scarce euros.
“Greece has to demonstrate a willingness to follow through and table some reforms extremely quickly,” Mujtaba Rahman, head of the Europe practice at consultancy Eurasia Group, said in a note to clients. Greek officials, he said “understand tomorrow and this weekend’s deadline by euro creditors is final.”
Market reaction has been muted, potentially strengthening creditors’ bargaining position. The euro fell 0.6 percent on Wednesday to $1.1075, while the benchmark Euro Stoxx 600 index was little changed. Greek bonds fell 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.
The leaders of all 28 European Union countries will meet in Brussels on Sunday to decide their response to Greece’s proposals. The ECB, which on Wednesday said it was leaving unchanged its level of aid to Greek banks, will meet next Monday to consider its own next moves.
Sunday’s gathering may represent the climax of the five-year effort to contain Greece’s debts, which exceed 170 percent of gross domestic product. A departure from the euro would represent a severe blow to the currency, which was designed to be irrevocable, and to the broader European project.
Securing a deal with creditors will almost certainly require Tsipras and his Coalition of the Radical Left, or Syriza, to stomach reforms it has resisted since coming to power in January. Greek voters emphatically rejected a program of spending cuts and tax hikes in exchange for a new bailout in a July 5 referendum.
On Wednesday, Greece put the first formal steps of its plea for a bailout into motion with a letter to the European Stability Mechanism, the body that co-ordinates financial assistance to member states.
After months of often-contentious interactions with creditors, the document signed by the new finance minister, Euclid Tsakalotos, struck a relatively conciliatory tone. It said Greece planned to honor all its debts and introduce tax and pension reforms as soon as next week. Although the document was thin on details, pension cuts had previously been characterized by Tsipras as one of the “red lines” Greece would not cross.
The ESM has begun the formal process of reviewing the request, which will be followed by more detailed proposals by the end of Thursday. Greek banks will remain closed until the end of the week to stem withdrawals, which are capped at 60 euros per person per day, causing long lines at cash machines.
“Should the Greek proposals be found wanting, the Europeans will go for Grexit quickly, instead of letting the country slowly slide into ‘Grexit by stealth,’” Gilles Moec, chief European economist at Bank of America Merrill Lynch in London, wrote in a note to clients.
A broad spectrum of European leaders has begun to talk openly about a Greek departure from the euro, a dramatic contrast from years of denial and deflection on the subject.
European Commission President Jean-Claude Juncker Tuesday night said the EU has “a Grexit scenario prepared in detail.” Donald Tusk, who leads the European Council, remarked that failed negotiations would mean “all the possible consequences, including the worst-case scenario where everyone will lose.”
Tsipras will have few sympathizers at the Sunday 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.
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.”