Greece's Euro Future May Be Back in Play If Rescue Talks Drag On

  • Creditors resume talks in Athens on bailout program review
  • Pensions, tax policy remain obstacles, EU officials say

Greece's Debt Is Still Unsustainable: SocGen's Juckes

Greece could again face the threat of being pushed into default and out of the euro if its current bailout review drags on into June and July, according to European officials monitoring the slow progress of Prime Minister Alexis Tsipras’s negotiations with creditors.

QuickTake Greece’s Financial Odyssey

Greece still hasn’t cut a deal on pensions, tax administration or its fiscal gap, and other issues like non-performing loans and a proposed privatization fund continue to slow the talks, said the European officials, who asked not to be named because discussions are ongoing. The International Monetary Fund presents another obstacle, they said.

IMF Managing Director Christine Lagarde was drawn into a spat with Tsipras over the weekend, with the Greek leader questioning the “good faith” of fund officials engaged in the negotiations after WikiLeaks on April 2 published the purported transcript of an internal IMF call. Lagarde in response released a letter hinting that the Greek government had spied on her team and leaked the document. The transcript shows three fund officials discussing ways to pressure German Chancellor Angela Merkel into conceding to their push for Greek debt relief.

Greek bonds fell, with the yield on the 2017 notes gaining 130 basis points to 10.22 percent at 11:20 a.m. in Athens. That’s the biggest jump in yields in more than two weeks and the first in four trading sessions. 

The euro area’s most-indebted member was almost forced out of the currency union last July before national leaders agreed to a third bailout package after all-night talks in Brussels. Merkel helped break the logjam then, warning it would be reckless and sow chaos to let Greece slip away from the currency union.

While European officials have talked up the prospects for the review in public recently, all sides have harbored doubts from the get-go about whether Greece could meet the strict budget goals at the heart of last year’s rescue. Those concerns have increased as Tsipras’s Syriza party has lost allies and the European Commission and the European Central Bank have faced stepped up demands from IMF negotiators.

“My odds for another Greek crisis this summer are relatively high,” said Carsten Brzeski, chief economist at ING Diba AG in Frankfurt. “Given the extremely slow pace of the implementations, the review, Syriza’s loss of popularity in opinion polls and still little appetite for debt relief, the next crisis is already in the making. It’s only a matter of time before it happens.”

Creditors Return

Mission chiefs from the commission, the ECB and the IMF were due to return to Athens on Saturday to resume work on the bailout review, which they once aimed to complete in November. Greece’s finances are up against an escalating series of payments, culminating in 2.3 billion euros ($2.6 billion) that come due on July 20 and the government won’t receive another infusion from its 86 billion-euro program until its progress in meeting the conditions has been endorsed.

Three IMF officials said that July repayment alongside the refugee crisis and the U.K. “Brexit” referendum were key events that could help force Merkel to accept their calls for debt relief, according to the WikiLeaks transcript.

Greece has said it’s willing to take additional budget measures equal to 3 percent of its gross domestic product, a commitment seen as sufficient by the country’s euro area creditors. Poul Thomsen, head of the IMF’s European department, has asked for an additional fiscal effort equal to at least 4.5 percent of Greek GDP. Two officials familiar with the talks said that the IMF may accept the latest Greek proposal so long as the euro area makes up the difference with debt relief.

“We are negotiating hard, and things are going well,” Deputy Finance Minister Tryfon Alexiadis said in an interview in Athens on Wednesday.

Senior European officials and euro-area finance ministers have been publicly optimistic about the pace of progress, praising Greece for its steps forward on pensions, tax administration and a required privatization fund. “Cooperation with Greek authorities is constructive and we are making policy progress in many areas,” EU Commission Vice President Valdis Dombrovskis told reporters Thursday in Paris.

Looking at Merkel

At the same time, officials working behind the scenes say it’s far from clear that the review can wrap up this month. If the talks continue to drag on -- depending on how outside factors like the migration crisis or the referendum on “Brexit” come into play -- the euro area could face another season of crisis, according to the officials.

Euro-area finance ministry deputies held a state-of-play call on Friday to discuss where Greece stands, as Athens talks resumed and nations were preparing for the IMF’s spring meetings in Washington. The deputies will have another chance to compare notes Apr. 7-8 in Brussels, and then finance ministers will gather next on April 22 in Amsterdam. Officials say they haven’t ruled out getting a political agreement ahead of that meeting, although it would take some time after that for cash to flow.

The “risk is there” that Greek talks could be derailed similarly to last year, said Marten Ross, the Estonian finance ministry’s deputy secretary general for financial policy and external relations, on March 9. Ross is one of the finance-ministry deputies tasked with recommending to finance chiefs how to proceed.

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