By Ambrose Evans-Pritchard 15 June 2015
The European Commission braces for a “state of emergency” in Greece, fearing social unrest and a break-down of basic supplies
Alexis Tsipras called on the IMF to “adhere to realism”.
Greek premier Alexis Tsipras has accused Europe’s creditor powers of trying to subvert Greece’s elected government after five years of “pillaging”, warning in solemn terms that his country will defend its sovereign dignity whatever the consequences.
The defiant stand came as the European Commission lashed out at the Greeks and warned that the country would collapse into a “state of emergency” unless there is a deal to avert a financial crash.
Germany's EU Commissioner Guenther Oettinger said the creditor powers must draw up urgent plans to cope with social unrest in Greece and a break-down of energy supplies and medicine as soon as July.
In a terse statement, Mr Tsipras called on the EU institutions and the International Monetary Fund to “adhere to realism”.
He accused the creditors of “political motives” for demanding further pension cuts, hinting that their real goal is to destroy the credibility of his radical-Left Syriza government and force regime change.
“We are not only carrying a historical past underlined with struggles. We are carrying our people's dignity as well as the aspirations of all Europeans. We cannot ignore this responsibility. It has to do with democracy,” he said.
Germany’s Suddeutsche Zeitung reported that the creditors are drawing an ultimatum to the Greeks, threatening to cut off Greek access to the European payments system and forcing capital controls on the country as soon as this weekend. The plan would lead to the temporary closure of the banks, followed by a rationing of cash withdrawals.
Syriza sources have told the Telegraph that Greece may seek an injunction from the European Court of Justice to stop the creditors and the EU institutions acting in a way that breaches Greek treaty rights. This would be an unprecedented move, greatly complicating the picture.
Equity markets fell across the Europe and bonds sold off sharply in the high-debt Latin states as investors start to think through the dramatic implications of a Greek default, followed by EMU rupture. “The Greek saga is finally reaching its climax, we think,” said Hans Redeker from Morgan Stanley.
An artist's view of the Greek flag after five months of labyrinthine debt talks
Yields on 10-year Portuguese bonds have jumped almost 170 basis points since their lows in March, reaching an eight-month high of 3.22pc. Spain’s yields have jumped by 120 points to 2.35pc.
While these levels are nothing like the panic spikes in past spasms of the EMU debt crisis, they are approaching levels that could soon tighten borrowing conditions for companies and mortgages. It may become harder for these countries to shake off deflation.
Mario Draghi, the head of the European Central Bank, said the authorities could handle the immediate fall-out from a Greek default but refused to offer any further assurances. “The consequences in medium to long term to the Union is not something we are in a position to foresee," he said.
Mr Draghi was accused of waging “systematic economic warfare” against Greece by a radical Euro-MP from Spain’s Podemos movement, one of a blizzard of virulent attacks in Strasbourg today that show just how dangerously polarised Europe has become after seven years of quasi-depression.
Morgan Stanley said a meeting of EMU finance ministers on Thursday will be “a make-or-break moment”, the last chance to reach a deal that can be scrutinised and passed by the German Bundestag and other national parliaments before June 30 when Greece must pay the IMF €1.6bn.
Mario Draghi said the ECB could not foresee long-term consequences of a Grexit
A Syriza official told the Telegraph that the final denouement may come earlier since depositors will almost certainly try to withdraw their money if there is no accord in sight, setting off a bank run. “We are a little surprised that it has not happened yet. Depositors have been very stoic,” he said.
The Greek side is furious that the creditors are demanding further cuts in pensions – already reduced by 44pc – knowing that this is an emotional red-line for the Syriza movement. They thought they had a deal to opt instead for defence cuts and tax rises.
The suspicion in Athens is that the creditors are deliberately engineering a Greek political crisis in what amounts to an arms-length coup d’etat, an allegation dismissed as absurd in Brussels. The IMF says the Greek pension system gobbles up 16pc of GDP – one of the highest in the world – and must be brought under control before there can be any further money.
The mood is hardening in Berlin where Volker Bouffier, the deputy leader of the ruling Christian Democrats (CDU), said nothing more can be done for a country bent on its own ruin. “It’s awful for the Greek people but we can’t have the rest of European people paying for utterly mad behaviour,” he said.
Slovakia is unhappy about the Greek welfare structure
Feelings are even harsher in Slovakia, where there is near universal indignation at funding a Greek welfare structure that Slovaks can only dream of. “Alexis Tsipras is swindling the whole world and this cannot go on forever,”said Jozef Kollar, vice-chairman of the finance committee.
In a crucial twist, the IMF’s chief economist Olivier Blanchard blamed both sides for the impasse, arguing that there was a limit to what Greece could bear and calling for significant debt relief to restore the country to viability. “A credible deal will require difficult decisions by all sides,” he said.
It is the first time that a senior IMF official has stated that Greece needs a haircut on its public debt – 180pc of GDP – implying direct losses for EMU taxpayers for the first time. The Fund pulled its Greek team out of Europe last week, letting it be known privately that it will not take part until the debt issue is confronted head on.
The withdrawal of the IMF itself has serious implications. Chancellor Angela Merkel is relying on the Fund’s credibility as the ultimate enforcer of reforms to give her political cover in Germany.
Volker Kauder, the CDU’s parliamentary leader, said the departure of the Fund brings matters to a head. “The IMF must remain in the boat, otherwise we cannot give any help,” he said.