BRUSSELS—Greece’s government pitched a last-ditch package of proposals to its creditors in a bid to avoid a collision with the rest of Europe on Monday that could leave the country facing default and capital controls.
The latest plan from Athens, comprising tax increases and spending cuts to hit budget targets required by lenders, was described by Greek and European officials over the weekend as possibly the country’s last chance to unlock urgently needed financing and keep its bailout program going.
European stocks and bonds rallied on hopes of deal in early trading Monday.
Greece’s confrontation with its main creditors—the rest of the eurozone and the International Monetary Fund—is reaching a decisive moment after months of stalemate and recrimination. Five years after the country first received a bailout, it is closer than ever to a messy debt default that could splinter the eurozone.
Failure to reach agreement by Monday’s emergency summit of eurozone leaders could put Greece on the road to bankruptcy and exit from the euro, senior European officials have warned in recent days. Without a deal then, Greece would have nearly no time left to secure fresh financing to meet debt payments falling due at the end of the month.
Whether the new Greek proposal satisfies officials from the IMF, the European Commission and European Central Bank will set the tone for Monday’s meetings. If the three institutions—which oversee Greece’s bailout program—don’t buy Athens’s math on how it plans to meet creditors’ fiscal demands, then eurozone leaders and their finance chiefs are expected to discuss how to deal with the consequences of Greek default, senior European officials have warned.
Sounding an optimistic note, senior commission official Martin Selmayr tweeted late Sunday that the Greek proposal was a “good basis for progress at tomorrow’s euro summit.” Among Greece’s bailout inspectors, the commission has been the most accommodating toward Athens, however.
Greece needs urgent financing help if it is to avoid defaulting on a €1.54 billion loan repayment to the IMF on June 30. That same day, Europe’s part of Greece’s €245 billion bailout program would expire without an agreement, leaving Greece with no clear way to repay €6.7 billion of bonds held by the ECB that fall due in July and August.
The ECB’s governing council is close to losing patience with what many of its members see as Greece’s stonewalling in bailout talks over recent months, according to people familiar with the matter. The Bank of Greece, a member of the ECB, has been providing emergency liquidity to Greek banks to cover the heavy deposit withdrawals by Greek citizens this year. Those withdrawals have picked up pace this month, reaching roughly €1 billion a day, as uncertainty over Greece’s fate has mounted.
The ECB, which must approve the rising use of emergency liquidity for Greek banks, has proved willing to do so as long as there is progress toward a deal between Athens and its creditors. But Greece’s resistance to its creditors’ terms, which were laid out on June 3 in what European officials described as close to a final offer, have hardened many ECB members’ attitude, according to people familiar with the matter.
Failure to reach agreement by Monday could well prove the final straw, leading the ECB to curtail the liquidity assistance potentially as early as this coming week, some European policy makers predict. That would force Greece to impose capital controls—limits on bank withdrawals and other transactions—dealing another severe blow to the country’s deeply depressed economy.
The new Greek proposal, approved by Prime Minister Alexis Tsipras’s cabinet on Sunday, seeks to achieve the strict targets for Greece’s budget surplus excluding interest that the eurozone and IMF have demanded—but with different fiscal means. Instead of significant cuts to pension spending and sharp increases in value-added taxes, the proposal relies on curbing exemptions in the tax and social-security system and raising taxes on corporate profits and middle-class incomes.
Specifically, Greece is offering to cut pension spending by around 0.5% of gross domestic product, instead of by 1% of GDP demanded by its bailout inspectors, while making up the shortfall by other means. The additional tax measures would also allow Greece to impose a lower rate of value-added tax on electricity than creditors demanded—another politically sensitive issue for the ruling left-wing Syriza party.
Mr. Tsipras informed German Chancellor Angela Merkel and French President François Hollande about the proposal in a telephone call on Sunday, while two senior Greek officials, Nikos Pappas and Euclid Tsakalotos, arrived in Brussels on Sunday to present the proposal to the institutions monitoring the bailout.
As five months of confrontational diplomacy between Greece and Europe come to a head, the key decision makers—Mr. Tsipras and Ms. Merkel—face the hardest dilemmas of their careers.
Mr. Tsipras must by Monday choose between playing by Europe’s rules, which offer bailout financing only in return for approved economic overhauls, or challenging those rules, by confronting Germany with the destabilizing consequences of a potential Greek bankruptcy and euro exit.
The 40-year-old Greek premier has for months oscillated between the conflicting counsel of his aides and cabinet ministers. The pro-conciliation camp, led by Deputy Prime Minister Yannis Dragasakis, is behind Greece’s new budget proposals prepared at the weekend, which seek to hit lenders’ fiscal targets via measures that are as palatable as possible to the ruling left-wing Syriza party, according to people familiar with the discussions. The proposals still entail a painful amount of belt-tightening, including for pensioners, however.
Others in Athens continue to believe that Germany will offer Greece better terms at the last minute if Mr. Tsipras doesn’t blink. Finance Minister Yanis Varoufakis on Saturday reiterated his view that Germany, not Greece, needs to choose between more lenient terms for Greece and destabilizing the eurozone. In an article for the German newspaper Frankfurter Allgemeine Zeitung, Mr. Varoufakis said Ms. Merkel must either offer Greece an “honorable agreement” that breaks with five years of loans-for-austerity, or destroy hopes for genuine reforms in Greece under Syriza.
“The choice, I am very much afraid, is hers,” Mr. Varoufakis wrote.
The belief in some parts of the Greek government that Ms. Merkel will blink on Monday stems from her known aversion to a Greek euro exit. The chancellor fears that a Greek departure from the euro would damage Europe’s, Germany’s and her own political standing, while the risks for the eurozone’s stability would be hard to calculate over time, even if short-term financial turbulence could be contained better today than in 2012, when Greece also came close to the brink. But the price of keeping Greece in the euro without thorough reforms appeals even less, German officials say. A deep-seated fear in Berlin holds that, if Athens can pressure Germany into lending it money—and even writing off past loans—while Greece only partially complies with its overhaul targets, then Germany will be unable to stop other euro members from letting go of fiscal discipline and economic competitiveness.