Creditors rule out massive third bail-out for embattled Greece

By Mehreen Khan 27 April 2015

Prime Minister Alexis Tsipras shuffles his bail-out personnel team as clock ticks in debt drama

Into the shadows: Finance minister Yanis Varoufakis has been sidelined in Greece's future bail-out negotiations Photo: Kostas Tsironis/Bloomberg

Europe's creditor powers have ruled out another "big" bail-out programme for Greece as the country edges ever-closer to an unprecedented default on its international lenders.

With relations between finance minister Yanis Varoufakis and his Eurozone counterparts reaching a fresh nadir on Friday, the head of the Euro group Jeroen Dijsselbloem said there would be no repeat rescue package of the magnitude agreed in 2010 and 2012.

It had been widely thought that cash-strapped Athens would require a fresh package of loans worth around €50bn to €60bn when its current programme ends in June.

However, Mr Dijsselbloem told Dutch newspaper de Volkskrant any new bail-out would be of a “completely different order” to the current €240bn rescue package.

Since its election in January, Greece's Syriza-led government has been seeking a "new contract" with its creditors, pleading for relief on a €330bn debt mountain, and a relaxation of the austerity measures the country has been subject to since 2012.

• Greece's grand plan: default and stay in the euro

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•Three myths about Greece's enormous debt mountain

Failure to agree a new bail-out package would further call into question Greece's long-term future in the currency union. The country faces another key period of debt redemption in July and August, when €6.8bn of government bonds held by the European Central Bank are due to mature.

Defaulting on the central bank would likely lead to the ECB pulling the plug on the country, warn analysts.

More immediately, Athens is scrambling to find the cash it needs to pay its public sector salaries and pensions worth €1.7bn at the end of the month. The Leftist government also faces a €960m loan repayment to the International Monetary Fund in the first two weeks of May.

But the government's attempts to force local government bodies to transfer their excess cash reserves to the Bank of Greece hit a buffer on Monday as municipalities said they would resist the measure until it was officially passed into law.

Athens' finance ministry estimates the raid could raise €1.5bn - €2bn for the state's coffers, helping tide the government over until the end of May.

Under pressure from Brussels, Prime Minister Tsipras has been forced to resort to drastic measures as Greece's bail-out standoff has escalated. Tensions reached breaking point last week when Mr Varoufakis was reportedly "hammered" for his failure to deliver on promises to reform the economy at a meeting in Riga.

In a bid to revive talks, the Greek premier moved to set up a new negotiating team which will be notionally headed by Mr Varoufakis and include prominent government officials such as Syriza's shadow finance minister and chief economics adviser Euclid Tsakalotos.

An Oxford-educated economist, Mr Tsakalotos is expected to take a more prominent role in negotiations with the Brussels Group. Greek markets rallied on the news of the minor reshuffle, closing 4.5pc, while yields on three-year government debt fell by nearly 4pc.

Jeroen Dijsselbloem (left) said there were "big, big problems" with Greece's current attempts to release bail-out cash

In a hint that he may be sidelined in further negotiations, Mr Varoufakis vented his frustrations on social media at the weekend, quoting Franklin Roosevelt in "welcoming the hatred" of his counterparts.

But in a sign that a compromise may be near, the Leftist government is reported to be ready to scrap plans to raise the minimum wage when it presents a fresh reform list to Brussels on Wednesday, according to reports in Germany's Bild.

A minimum wage hike has been a cornerstone of Syriza's pre-election pledge to end Greece's "humanitarian crisis", but has proven to be a major obstacle for creditors, who are demanding a raft of revenue-raising measures including VAT hikes and public sector privatisations.

Greece has been forced to undergo a painful process of "internal devaluation", slashing wages in a bid to gain competitiveness at the expense of its northern creditor member states.

But despite the adjustment, new figures from Eurostat showed the country had the highest rate of underemployment in Europe. A staggering 72.1pc of all part-time employees in Greece wanted to work more hours in 2014, compared to the EU average of 22.2pc.

Conservative estimates of Greece's parlous finances expect the government to run out of cash by mid-May. In the absence of fresh bail-out money, there is a 50pc chance of "some form of Greek sovereign default," according to Stephanie Flanders of JP Morgan Asset Management.

"Carefully handled, a partial default does not have to cause lasting damage to Greece or European markets. Nor does it have to lead to a Greek exit from the Eurozone," said Ms Flanders. "But at a minimum, investors should be prepared for a messy few months for Greek financial markets."

A Greek default would also be a "systemic event for markets", said analysts at Goldman Sachs.

"Peripheral spread volatility is likely to increase as time goes by, as investors will associate a higher probability of default to a higher probability of Grexit," said Silvia Ardagna, at Goldman Sachs.

Creditors rule out massive third bail-out for embattled Greece - Telegraph