Greek default draws closer as opposing sides swap ultimatums

By Ambrose Evans-Pritchard, and Szu Ping Chan 02 June 2015

'The Greeks cannot have their cake and eat it. A hard choice has to be made between euro exit and adjustment to remain in EMU,' says Goldman Sachs

It is understood that Europe's proposals offer no real concessions on Greece's 'red lines' on pensions and labour rights Photo: EPA

Greece and its European creditors have both issued “last ditch” demands in their bail-out talks that appear incompatible, raising the stakes in an increasingly dangerous showdown.

The Eurozone's negotiators and the International Monetary Fund have been putting the finishing touches on what amounts to a package of take-it-or-leave-it conditions that offer scant leeway on Greece’s austerity or debt relief.

It is understood that the proposals offer no real concessions on Greece’s “red lines” on pensions and labour rights. The creditors have promised a degree of flexibility but continue to insist that the far-Left Syriza government comply with the chief sticking points of the old EU-IMF Troika”Memorandum”.

Alexis Tsipras, Greece’s prime minister, pre-empted the move by rushing through his own set of proposals, more or less conceding in advance that his plans will not be accepted by the technocrats.

“The decision now lies with the political leadership in Europe,” he said.

Mr Tsipras seemed determined to show that Greece is still the master of its fate, if only before his own people.

“We are not waiting for them to submit their own plan back to us. Greece is the one that submits the plan,” he said.

Huw Pill, at Goldman Sachs, said a sovereign default along with a freezing of bank deposits and a parallel scrip currency or IOU are increasingly likely and may even be “necessary” to break the impasse.

“The platform on which the current Greek government was elected is simply infeasible. The Greeks cannot have their cake and eat it. A hard choice has to be made between a euro exit and an adjustment to remain part of the single currency,” he said.

Mr Pill said the country now faces such an acute crisis that it may soon be forced into policies that hurt its core supporters for the first time, changing the character of the Greek political drama.

“As the liquidity squeeze intensifies and cash reserves are exhausted, the (creditor) seniority enjoyed by pensioners and public sector workers evaporates. Being first in the queue does not help when there is no cash left,” he said.

Whether Mr Tsipras will in fact retreat in order to keep Greece in the euro is far from clear. He threw down the gauntlet in a blistering article in Le Monde on Sunday, accusing the creditors of making “absurd demands” and asphyxiating democracy in Europe.

Mr Tsipras alleged that the EU powers wish to “make an example out of Greece” so that no other country will dare defy the austerity regime or the “doctrines of extreme neoliberalism”.

While the language was Marxist, his threat to default and detonate a strategic crisis in Europe was wickedly Byzantine.

“If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, For Whom the Bell Tolls,” he said.

Yannis Dragasakis, the deputy prime minister and normally a conciliator, issued his own warnings in a series of tweets on Tuesday morning. “We will not accept ultimatums nor succumb to blackmail,” he said.

Mr Dragasakis said Greece cannot withstand further austerity and insisted that Syriza will not accept a deal unless the target for the primary budget surplus is cut to 1pc of GDP in 2015 and 1.5pc next year. The Eurozone wants a medium-term surplus of 3.5pc.

While the creditor bloc has tried to maintain a unified front, it is riven with differences. The German coalition itself is deeply split, with the Social Democrats (SPD) expressing open irritation with hardliners in the German finance ministry.

Greek PM Alexis Tsipras

Sigmar Gabriel, the SPD leader and German vice-chancellor, said the world would lose all confidence in Europe if the EMU project broke apart in its first big crisis. He warned that consequences of a Greek bankruptcy would be “gigantic”.

A quintet of key figures held an emergency meeting in Berlin on Monday night to thrash out an emergency position as time runs out. Hosted by German chancellor Angela Merkel, it included French leader Francois Hollande, the heads of the European Central Bank and Commission, as well as Christine Lagarde, head of the International Monetary Fund.

They broadly agreed on a technical paper drafted by the Commission, but that in itself solves nothing.

Euro group chief Jeroen Dijsselbloem played down any hope of a deal this week, leaving it unclear what will happen on Friday, when Greece must pay the IMF €300m (£218.3m).

“There is some progress, but it’s really not enough,” he said

There is a growing concern that much of the Syriza leadership – and possibly Mr Tsipras himself – has already concluded that a deal on tolerable terms is impossible, and may be resigned to default and a return to the drachma rather than betray their cause. If so, the strategy at this point is to try to justify a final rupture by persuading Greek public opinion that Grexit was forced upon them.

Gabriel Sterne, at Oxford Economics, said the prevailing narrative that Syriza keeps making mistakes and is drifting towards disaster is “half-baked and superficial”.

It assumes that Mr Tsipras wishes to remain in the euro at all costs and is therefore likely to capitulate in the end. Yet he may equally have concluded a return to the drachma might not be so bad and that he will pay an even higher political price if he abandons his election pledges.

Mr Sterne said there is “universal anger over creditor treatment” in Greece. While there are many opinion polls, the one that matters may be a survey showing that 58pc of Syriza voters would rather return to the drachma than submit to Troika policies.

Greek default draws closer as opposing sides swap ultimatums - Telegraph