Despite all the tough talk and ultimatums, Greece and its creditors in the 19-country eurozone are still expected to cobble together some sort of deal that will allow the country to remain a member of the euro currency.
Investors and European policymakers are not panicking despite a breakdown in talks between the two sides over the new Greek government’s attempt to renegotiate its financial bailout.
That’s likely because they’ve been here before – the eurozone has in recent years frequently run into moments of brinkmanship, often with Greece. Each time, a deal was eventually clinched.
Both sides want to avoid the worst-case scenario in which Greece is cut off from aid and has to leave the euro. That would devastate Greece’s economy and rock European and global financial markets.
“If Greece were to leave the euro, the financial chaos that would follow could also spell the end of the Syriza-led government,” said Jane Foley, an analyst at Rabobank International, referring to the radical-leftist party that won elections last month.
“For this reason, it remains our central view that an eleventh-hour compromise between Greece and its creditors is still likely.”
They’re on borrowed time. Greece’s European bailout program ends after Feb. 28, and the longer a deal is not found, the more jittery markets are likely to get.
While the stock index in Athens declined only modestly Tuesday, Greece’s government borrowing rates are rising steadily, a sign investors are more wary of a potential bankruptcy.
No one is discounting the possibility that Greece might fail to agree on a deal with its creditors, a development that could have big and unforeseen consequences both for Europe and the global economy.
The latest tension centers on the eurozone’s ultimatum to Greece to ask for an extension to its bailout program by Friday before further negotiations on the country’s future financing can take place.
Greece’s Syriza government made scrapping the bailout program a cornerstone of its recent triumphant election campaign. In return for 240 billion euros ($275 billion) of rescue money Greece has been getting since 2010, successive governments have had to implement budget austerity measures like deep cuts to spending and pensions.
Syriza, in power for barely three weeks, blames those measures for the country’s economic ills. The Greek economy has suffered through a depression, and unemployment and poverty have swelled.
“It would be an act of subterfuge to promise to our partners to complete successfully a program we challenged the logic of,” said Greek Finance Minister Yanis Varoufakis.
WHERE’S THE COMPROMISE?
Jeroen Dijsselbloem, the top official in the eurozone who issued the ultimatum, is hopeful that Athens will agree to extend its current program, and as an encouragement, he laid out the prospect of an immediate renegotiation of some of its terms.
A deal could depend on something as simple as what to call such an extension.
The Greeks do not want any deal that suggests the current program is being kept alive. Instead, they want a “bridging program.”
Greek government officials Tuesday said the country is considering requesting an extension to its loan agreement. But the officials, who spoke on condition of anonymity pending the formal announcement, stressed the request would not be for an extension of Greece’s bailout agreement, which includes strict cost-cutting measures as conditions for rescue loans.
It was unclear whether such a request would meet the requirements of Greece’s creditors.
Whatever the deal is named, both sides want the country to get a few months’ worth of loans to buy time for more thorough talks. If they can agree on a way to describe such a deal in a manner that saves face for both sides, a deal would be a lot closer, analysts say.
Varoufakis was hopeful. “We are ready and willing to do whatever it takes to reach an agreement over the next two days,” he said late Monday.
COST OF FAILURE
Among the main reasons experts still expect a deal is that failure would cost both sides dearly.
Economists at Commerzbank estimate that falling out of the currency union would result in Greece’s economy shrinking another 10 percent. That’s on top of the 25 percent it has already plunged since the crisis, putting it through a downturn similar to the United States’s Great Depression of the 1930s.
A new currency would fall sharply in value, meaning painfully higher prices for imports like medicine and gas. Companies’ debts in euros would swell, forcing many into bankruptcy.
In the rest of the eurozone, taxpayers would be handed big losses on bailout loans their governments gave Greece.
The eurozone bailout fund – a pot of money backed by taxpayers – is owed 142 billion euros, individual countries are owed 53 billion euros and the European Central Bank 20 billion euros. The Greek central bank owes another 50 billion euros to eurozone central banks.
Progress will require more talks and a gradual building of trust.
German Finance Minister Wolfgang Schaeuble complained that communication was not good.
“A lot of colleagues were asking, ‘What do they really want? Do they have a plan?’ ” Schaeuble said, adding, “I don’t know.”
Aengus Collins, an analyst with The Economist Intelligence Unit, said, “The two sides are running down their reserves of trust more quickly than they are narrowing the gulf that separates them.”
He said his team “remains of the view that a last-minute deal will be agreed, but the risk of ‘Grexit’ remains high, at 40 percent.”
– – –
David McHugh in Frankfurt, Geir Moulson in Berlin and Elena Becatoros in Athens contributed to this report.