Eurozone Sets Sunday Deadline for Greece Financing Deal

By Gabriele Steinhauser And Matthew Dalton 

        BRUSSELS--Eurozone leaders set Greece a Sunday deadline to reach the outlines of a new financing deal that the German chancellor said would have to include overhaul measures that had been dropped from negotiations in recent months.
        As a sweetener for such a deal, which would largely contradict the results of last weekend's referendum in Greece that overwhelmingly rejected more austerity, the other eurozone countries could look at ways to make Greece's debt sustainable again, Chancellor Angela Merkel said after an emergency meeting Tuesday with the leaders of the other 18 euro countries.
        Such a discussion on debt would not include any cuts to the nominal value the debt, she said. It would also have to happen only after an agreement on overhauls and budget cuts has been reached, Ms. Merkel said.
        "Of course, at the very end, one will have to discuss how debt sustainability can be recreated but not by saying first 'How do we close the gap?' but "What can Greece do?' " Ms. Merkel said.
        Before that, however, Greece needs to credibly commit to the budget cuts and overhauls its voters rejected along with further measures--for instance on liberalizing the labor market and privatizing state assets--that had been left out of talks from an extension of Greece's old bailout, Ms. Merkel said.
        "This isn't about a program from today, or from yesterday or from 10 days ago, for a program until November, ... this program is, according to the now-withdrawn Greek request, meant to be two years long, so it's a multiyear program," Ms. Merkel said.
        "That such a multiyear program has to entail more commitments is in itself clear," she added.
        Ms. Merkel said eurozone leaders would meet again Sunday--along with their counterparts from the other nine European Union countries--to see if negotiations on a new bailout are possible.
        "We need to have a relative certainty that such negotiations make sense, " Ms. Merkel said.
        Greek Prime Minister Alexis Tsipras said after the meeting that the negotiation process would be fast. "I believe there will be a solution by the end of the week at the latest," he said.
        During Tuesday's talks, Mario Draghi, the president of the European Central Bank, made clear that Sunday would be "the right moment to take decisions" if Greece wants to avoid a meltdown of its banking system, Ms. Merkel said.
        Greek banks have been shut for more than a week, after the ECB capped emergency lending that had been buffering growing deposit outflows.
        If the government in Athens fails to repay a EUR3.5 billion ($3.8 billion) bond redemption on July 20, the ECB may have to cut Greek lenders off altogether--a move that would send the country's financial system into meltdown.
        Emboldened by Sunday's referendum, Greek Prime Minister Alexis Tsipras came to Brussels to present his eurozone counterparts a proposal for interim financing until the end of the month, a senior Greek government official said. That would give Greece and its creditors time to work out a longer-term financing deal and avoid defaulting on the ECB.
        Eurozone leaders warned in advance that any Greek ideas were bound to go nowhere if they didn't contain a commitment to implement policy overhauls and budget cuts that Greece's creditors say are necessary to bring the country back to growth.
        The proposal Mr. Tsipras made at the summit appeared to fall short of those demands. "In return [for short-term financing], Greece will pass some of the overhauls demanded by the country's international creditors, " the Greek official said, adding that Greece remained open to other ideas for "a big viable solution."
        France, which has been Greece's biggest eurozone ally, is also pushing for a deal in which Athens accepts and passes the budgetary measures--with limited changes--that were in the plan rejected in the referendum.
        As a sweetener for accepting unpopular measures, Greece would receive immediate financing and the prospect of a future restructuring of its debt, a senior French official said. Other officials, however, cautioned that there was a lot of reluctance to commit to debt relief as long as trust between Greece and the rest of the eurozone hasn't been restored.
        "Effectively, nothing has changed" after the referendum, said the French official.
        In a wave of support for Mr. Tsipras, 61% of Greeks who voted last weekend were against the additional pension cuts and tax increases demanded by lenders for additional funding. But Ms. Merkel held firm going into the summit, noting that time was running out.
        "Without reforms, the path that we have to take won't be possible," she said.
        A nonpayment to the ECB would be Greece's second major default in less than a month and would make it difficult for the ECB to maintain its emergency lending to Greek banks. A cut to that support would lead most banks to collapse and could force the government to issue its own currency to recapitalize them.
        Mr. Tsipras was hoping to use the leverage from his referendum victory to win enough of a political nudge from the summit that would allow the ECB to keep its lifeline in place.
        He raised the idea of interim financing with Ms. Merkel, French President Francois Hollande and Jean-Claude Juncker, head of the European Union's executive Commission, ahead of the summit, the Greek official said, adding that it would be discussed further during the summit itself.
        The French official said that once Greece got the immediate financing, the two sides would negotiate a two to three-year deal that would involve cutting the interest rates and extending the maturities on Greece's debt. Athens then would pass the more long-term measures demanded by its creditors, such as liberalizing service industries.
        Emboldened by Sunday's poll results, Mr. Tsipras's government sought a consensus with opposition parties for a new bailout proposal to present. But that plan offered no economic-policy specifics beyond a call to reduce Greece's debt mountain.
        At the so-called Eurogroup meeting of finance ministers, Greece's new finance chief, Euclid Tsakalotos, read out proposals the government had presented last week, but promised that a new plan would be sent to creditors on Wednesday, three European officials said. That would allow Mr. Tsipras to await the outcome of the summit before he commits to any new moves.
        Another area that could still require compromise between Athens and the other 18 eurozone governments is Greece's towering debt, which stood at 177% of gross domestic product at the end of last year.
        The International Monetary Fund, which Greece technically defaulted on last month, has said "comprehensive" debt relief should be included in any further bailout. But divisions still run deep in Europe.
        Write to Gabriele Steinhauser at gabriele.steinhauser@wsj.com and Matthew Dalton at Matthew.Dalton@wsj.com
        (END) Dow Jones Newswires

        July 07, 2015 17:49 ET (21:49 GMT)

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