Greece Rushes to Craft Reform Plan as EU Chiefs Voice Skepticism

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Lagarde and Lew Call For Action to Avoid 'Grexit'

Prime Minister Alexis Tsipras is under pressure to show how far he’s willing to go to keep Greece in the euro as European leaders express skepticism he can deliver tough reforms.

With a cacophony of voices predicting a possible exit of Greece from the currency, the government has until Thursday midnight to present an economic plan that includes spending cuts, in exchange for a new bailout. Pressure is also mounting on Greece’s creditors to make the country’s debt more sustainable, giving it a chance to rebound from a crisis that has slashed a quarter of its economy.

European Central Bank President Mario Draghi in a Corriere newspaper interview published Thursday characterized the Greek situation as “really difficult.” The continent’s most-indebted country has never been closer to leaving the currency after more than six European leaders made clear this is its last chance. Failure to get a deal could result in the ECB cutting funds to Greek banks, forcing the country to issue IOUs or some other form of exchange to prevent economic collapse.

“A few months ago I wouldn’t have believed that Greece would leave the euro area,” ECB Governing Council member Ardo Hansson said in an interview in Estonian newspaper Postimees. “Now Greece’s situation is much worse than it was even 10 days ago. The situation isn’t hopeless but it is quickly and sharply deteriorating.”

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German Chancellor Angela Merkel, who as head of Europe’s biggest economy carries the most sway, is doubtful Tsipras will deliver a credible plan, and is willing to accept a Greek exit, according to two government officials familiar with her strategy asking not to be identified discussing internal deliberations.

Market Reaction

Market reaction suggested investors are not unduly concerned about the situation in Greece. The benchmark Stoxx Europe 600 Index rose 2.2 percent as of 6:04 p.m. Brussels time and the euro slid 0.5 percent to $1.102. Greek, Portuguese and Italian bonds rose on optimism that an accord would be reached, or that the ECB would act to protect markets.

Pressure is also mounting on Merkel and other European leaders to a strike deal.

“Realistic proposal from Athens needs to be matched by realistic proposal from creditors on debt sustainability to create win-win situation,” European Union President Donald Tusk said in a Twitter post Thursday.

The European Commission’s vice president for the euro, Valdis Dombrovskis, said member states are open to considering debt relief for Greece, although principal writedowns would be politically difficult.

“There’s lots of frustration, but there’s still willingness to reach an agreement if the Greek side is also behaving responsibly and actually starts implementing serious reforms,” he told journalists on a conference call Thursday.

Puerto Rico

In the U.S., Treasury Secretary Jacob J. Lew called for an agreement that keeps the euro area intact, saying a long-term solution must include restructuring of Greece’s debt.

“It is in the best interest of all parties to find a resolution,” Lew said Wednesday at a Brookings Institution event in Washington. “Greece needs a path towards a sustainable debt path.”

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German Finance Minister Wolfgang Schaeuble said he’s less optimistic about the role re-profiling can play in making Greek debt sustainable. Speaking at an event in Frankfurt, he joked that he told Lew “we could take Puerto Rico into the euro zone if the U.S. were willing to take Greece into the dollar union.”

The leaders of all 28 European Union countries will meet in Brussels on Sunday to decide their response to Greece’s proposals. The ECB said Wednesday it was leaving the level of aid to Greek banks unchanged. It will meet on Monday to consider its own next moves. Greece, meanwhile, extended its bank holiday and capital controls through Monday.

Syriza Capitulation

Sunday’s gathering represents one of the biggest tests of a five-year-long effort to contain Greece’s debts, which exceed 170 percent of gross domestic product.

Securing a deal will almost certainly require Tsipras and his Coalition of the Radical Left, or Syriza, to capitulate to changes they have resisted since coming to power in January. Greek voters emphatically rejected a program of spending cuts and tax hikes in a July 5 referendum.

On Wednesday, Greece sent a letter to the European Stability Mechanism, the entity that co-ordinates financial aid to member states, requesting a three-year bailout loan.

After months of often-contentious interactions with creditors, the document signed by the new finance minister, Euclid Tsakalotos, struck a conciliatory tone. It said Greece planned to honor all its debts and introduce tax and pension reforms as soon as next week. Tsipras had earlier characterized pension cuts as one of the “red lines” Greece wouldn’t cross.

Stiff Opposition

Still, Tsipras faces stiff opposition from within his ruling party.

“Greece is obviously working to secure an immediate deal, but it must be a deal that opens a window out of the current crisis,” Energy Minister Panagiotis Lafazanis, a hard-line Syriza member, said at a conference in Athens Thursday. “We don’t want a third memorandum with tough austerity measures.”

‘Any agreement on potential debt relief -- more likely debt re-profiling -- will only be decided in October, after all reforms have been adopted by the Greek Parliament,’’ analysts at Societe Generale wrote in a note to clients. “The latter condition will be extremely difficult for the Greek government.”

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