Greece’s attempt to negotiate a quick deal with international creditors has been shot down, with Germany and the International Monetary Fund acknowledging there was still a lot of work to do before the June 5 payment deadline.
Talks between Greece and its Eurozone partners broke down at last week’s European Union summit in Riga, with Germany and the IMF dismissing Athens’ optimism that a deal would be finalized shortly.
IMF managing director Christine Lagarde warned against a “quick and dirty” deal for Athens on Friday, stating that both sides were still far apart on a deal.
“I know there is a lot of work to be done,” the IMF head said in Rio. “Parties are now working, receiving proposals, working in cooperation and we will continue to do so as fast as we can.”
She added, “It has to be a comprehensive approach, not a quick and dirty job.”
German Chancellor Angela Merkel described the latest round of negotiations as “constructive,” but said there was still a lot of work to do.
“France and Germany have offered Greece and the Greek Prime Minister that whenever there are questions to be discussed, whenever there is help to be given, to do so but the conclusion needs to be found with the three institutions and there needs to be very, very intensive work,” she said.
The IMF, which shoulders the bulk of Greece’s €240 billion bailout package, is opposed to giving Athens more emergency loans. The troika of creditors has withheld a critical €7.2 billion payment as for Greece’s refusal to sign off on tough economic reforms related to pensions, public sector workers and taxes. Greece faces a tough payment schedule next month, including a €1.5 billion commitment on June 5. While Greece has until the end of June to extend its bailout agreement or reach a new deal, June 5 is considered the more tangible deadline.
Greece is unlikely to pay the “whale amount” of its bailout loans should it fail to make the June 5 deadline, according to an IMF memo dated May 14.
Redrawing Red Lines
With creditors failing to share Greece’s optimism that a comprehensive deal could be reached any time soon, the Greek government is back to the drawing board. Greek officials have made it abundantly clear that they are unwilling to negotiate beyond their “red lines,” which consist of campaign promises related to pensions and public sector jobs. However, with the IMF unlikely to budge in its negotiations, Greece may have to choose between keeping its campaign promises and avoiding a bigger liquidity crunch.
The IMF has already prepared a contingency plan for a Greek default. This was confirmed by a senior IMF official, who said earlier this month that the international lending institution “is working with national authorities in southeastern Europe on contingency plans for a Greek default.”
This Plan B would require cooperation from regional neighbours as well as Greek banks, according to IMF deputy director Jorg Decressin.
German finance minister Wolfgang Schaueble, an outspoken critic of Athens’ bailout negotiations, is reportedly pressing for a “parallel currency” to be introduced in Greece. The idea, as reported by Bloomberg News, would be for Greece to issue an IOU program to cover public pensions and salaries. In order for this to work, this “parallel currency” would likely have to be given the same value as the euro.
The latter provision has been flagged by economists as a dangerous step because it could open up a massive black market should the public not buy-in to the second currency.
Schaueble’s notion of a “parallel currency,” which has been floated around before, is a clear sign that Eurozone member-states are less concerned about a Grexit as they were before. Some German officials have reportedly compared Greece to a “gangrenous leg” that should be cut off. If these views hold sway, it is difficult to argue that Greece holds any real leverage in its negotiations.