Failure to agree to bailout increases probability of Grexit

28 Jun 2015 | Author: | No comments yet »

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The eurozone has rejected a Greek request for a one-month extension to its bailout, plunging the country into a period of high uncertainty and raising concerns about wider fallout from the crisis when financial markets open on Monday.Greece’s main opposition New Democracy party has returned to parliament and the session has resumed to discuss the prime minister’s call for a referendum on reform proposals suggested by the country’s international creditors.Creditor governments meeting in Brussels on Saturday night pledged to halt Greece’s bailout on Tuesday after the leftwing government abandoned five months of negotiations with its European lenders and called a referendum that may propel the country out of the euro.

The currency union’s authorities are ready to deal with possible contagion, Jeroen Dijsselbloem, who presides over meetings of eurozone finance ministers, said Saturday after talks here with the ministers of all 18 eurozone countries apart from Greece. Its delegate, Yanis Varoufakis, the finance minister, then left the session which focused on damage limitation and preventing Greek financial turmoil from spreading to other vulnerable parts of the eurozone. “It’s a sad day,” said ministers from across the continent as Europe braced itself for more turbulence and leaders started shifting to avoid the blame for the debacle. The proposal needs 151 votes and it is expected to pass as the coalition government of Tsipras’ radical left Syriza party and a small nationalist party holds 162 seats. One week ago Greece-watchers were wondering whether Alexis Tsipras’s left-wing government could strike a deal with its creditors in time to unlock the bail-out money it needs to avoid defaulting on a €1.5 billion ($1.7 billion) IMF payment due on June 30th. New Democracy head Antonis Samaras walked out during the heated debate after a bitter dispute with parliament speaker Zoi Konstantopoulou, whom he accused of violating parliamentary procedures.

It remains unclear at this stage if the expiry of the bailout, which is this Tuesday, means the emergency financial assistance which is keeping Greece afloat will continue. The finale came on Friday with a last offer from the creditors – the European commission, European Central Bank and International Monetary Fund – which represented a take-it-or-leave-it ultimatum, revamping the pensions system, creating a new VAT regime, slashing the defence budget, and cutting proposed taxes on business in return for a five-month bailout extension worth €15.5bn (£11bn). EARLIER: Greek prime minister Alexis Tsipras has rejected an “unbearable” bailout plan, setting a snap election on whether the country should adopt more austerity measures. Financial experts from both sides were still negotiating in Brussels late on Friday when the call came through from Athens ordering them to quit, Dijsselbloem said. He says the eurozone nations’ “assessment was that we are in a much better situation than we were following the collapse of Lehman Brothers, when Europe was ill-prepared.” “It’s not I think a question of waiting to see what might happen on Monday in terms of crisis — the crisis has commenced,” he told reporters as he left a eurozone meeting.

In the end, Luxembourg Finance Minister Pierre Gramegna said Greece gave the other eurozone ministers no choice but to vote against extending the bailout program for Greece, a move which sent Athens toward an uncertain financial future. Greek Finance Minister Yanis Varoufakis warned that his colleagues’ decision to leave his country without support until the July 5 vote would cause “permanent damage to [their] credibility.” “Europe can still ask Greek people to vote ‘yes’ to an improved proposal” for financial aid, said Mr. The creditors’ ultimatum would have solved little, but it would have kept Greece in the euro at least until Christmas, giving both sides a chance to cool off, build trust and buy time all round. The creditors’ offer, he said, proved that “certain partners and members of the institutions are not interested in reaching a viable and beneficial agreement for all parties, but rather the humiliation of the Greek people.” After Mr Tsipras’s speech Greek ministers fell over each other to say they would recommend a “no” vote.

Mr Tsipras’s declaration seemed an acknowledgement of something his government has long denied: that Greece must choose between the creditors’ path of austerity and leaving the euro. Some eurozone ministers called Tsipras’s decision “bizarre” and said they were mystified about what he was trying to do. “The question of Greece’s eurozone membership has been officially opened,” said a Deutsche Bank analyst. The eurozone’s top official says the door remains open for more talks with Greece, even though the country’s government insisted that the international creditors had issued an ultimatum that forced it away from the negotiating table. The negotiations that have been taking place since Tsipras’s leftwing Syriza movement won national elections in January have resembled trench warfare for months and, in recent weeks, have degenerated into a slanging match. The biggest risk in the coming days could come from a run on Greece’s banks, as depositors worried about the country’s future in the eurozone withdraw their savings.

If he stayed in office with a yes verdict behind him, there would be zero confidence on the other side of the table, especially among the Germans, in negotiating with him. Amid the reaction, many officials now expect Greece to introduce capital controls, possibly as soon as this weekend. “You’ve seen Cyprus,” said one official, referring to another eurozone country that limited the withdrawal of cash and transfer on funds abroad in 2013 amid a big banking crisis. Greece, Mr Varoufakis seemed to be arguing, deserved yet another extension of its bail-out to give the government time to advise voters to reject its terms, because that advice might well be rejected.

But those loans can be stopped by the ECB’s governing council, which includes central bankers from other eurozone countries, if there is concern that Greek lenders are no longer solvent. The governing council of the ECB, which has been keeping Greece’s banks afloat via an emergency liquidity assistance (ELA) programme, will convene tomorrow morning to discuss its support. With up to €1 billion having been withdrawn from Greek banks today alone, that will surely oblige Greece’s government to impose capital controls this week. In the marathon negotiations of the past 10 days, some complained the Greek officials had not told them of the referendum call and that now it was too late to do anything about it.

A statement from the Eurogroup today came close to recommending such a move. “This is a immediate problem, not only because the banks are depleted of collateral for ELA but also because the banks’ non-performing loans are skyrocketing now that the economy has dipped back into recession,” says Megan Greene, chief economist of Manulife Asset Management. Greece owes €320bn, most of it to eurozone governments, and a full default will prove expensive for the others, not least Germany, which has €92bn at stake. Schaeuble said that “if I understood correctly … we now have no basis for further negotiations.” He was looking forward to hear what his Greek counterpart Yanis Varoufakis would have to say about the latest developments. “We’ll see what he says. With Greece, apparently you must never rule out surprises,” Schaeuble said. “But to be honest, none of the colleagues I spoke to beforehand sees any possibility for what we can do now.” Finland’s finance minister, Alexander Stubb, warns that Greece’s referendum announcement has forced eurozone nations to assess other options if the bailout talks fail. Mr Tsipras has been under intense pressure from the extreme left wing of his Syriza party not to give ground to creditors; some backbenchers have threatened to bring down his government if a deal is put to parliament.

He says that “there is pretty much a consensus inside the eurogroup that we cannot extend the program as it stands,” he said. “Consequently I would argue that Plan B becomes Plan A,” he said, without elaborating. The EU’s economics and monetary affairs chief, Pierre Moscovici, says the differences between Greece and its creditors can be bridged, and he emphasizes the importance of Greece remaining in the 19-nation euro bloc. But Syriza, with or without Mr Tsipras at its helm, is far ahead of any rivals in opinion polls and may well be returned to office if snap elections were called. The negotiators representing Greece’s lenders are also proposing to pledge debt relief, though it would come with strings attached and not as part of the current bailout package.

The six-month rescue extension being mooted would see Greece qualify for €7.2bn in bailout funds still to be disbursed as well as €10.9bn already lent to the country but earmarked for recapitalisation of its weakened banks. After our last meeting, the door on our side was still open, but that door has closed on the Greek side.” Greece has a debt repayment on Tuesday it cannot afford and its bailout program expires the same day. In a heated phone conversation with Mr Tsipras last night Angela Merkel, Germany’s chancellor, is reported to have told him that his referendum would amount to a vote on Greece’s euro membership. And what he (Tsipras) would like — for Europe to send 20 or 30 billion in aid programs to Greece, but without any conditions — Europe cannot accept.” The Greek Parliament will open a debate at noon local time on whether or not to approve the government’s planned referendum on the creditors’ latest proposal for a bailout.

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