Greece bailout talks break down, increasing chances of default

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A sense of doom and frustration enveloped the talks to reach a new bailout accord between Greece and its creditors on Thursday, boosting the chances that the cash-strapped country will default early next week.

European Union finance ministers and government leaders expressed dismay that the talks, which seemed on the verge of a breakthrough early in the week, had all but collapsed. German chancellor Angela Merkel told journalists just before the start Thursday of the two-day EU summit that "one even has the impression that we've regressed a bit."

In a closed door meeting, she expressed her frustration by insisting "we will not be blackmailed" by Greece, Reuters reported.

In a tweet on Thursday, Slovak finance minister Peter Kazimir wrote, "Allow me not to be optimistic anymore – but I'd like to be proven wrong."

A rare hint of optimism came from French president François Hollande, who said that an agreement was "possible and necessary" and urged Greece's creditors – the EU, the European Central Bank and the International Monetary Fund – to reach an agreement quickly to temporarily stabilize Greece with an injection of €7.2-billion ($9.9-billion) of loans withheld from the current bailout. The bailout expires on June 30. That is the same day that Greece must make a €1.6-billion debt payment to the IMF.

"Let me say this: The earlier the better," Mr. Hollande said. "Because when an agreement is possible, when it's necessary, the accord must come. Not just because it's useful, but because there is nothing to gain by taking much more time. Greece doesn't have any left."

The finance ministers of the euro zone countries have met three times this week with Greek negotiating teams, led by Prime Minister Alexis Tsipras. They had hoped to break the stalemate by Thursday and send the compromise proposal to the EU leaders, after which the Greek parliament would vote on the fresh bailout package.

While some of the substantive issues have been resolved, there is still significant disagreement over pension reform, corporate tax rates and the value-added tax (VAT). Greece's talks with its creditors collapsed Thursday morning, when the creditors demanded that Mr. Tsipras accept a compromise proposal. They told him that, if he were to reject it, the proposal would be sent to the finance ministers as a "take it or leave it" deal.

Greek Finance Minister Yanis Varoufakis then presented his own proposal, which evidently convinced the finance ministers to call off their threat. The Greek team and the creditors are to meet again on Saturday, with Ms. Merkel reportedly insisting that a new deal be agreed before the markets reopen on Monday.

Investors fear that a default could create financial chaos, crippling the Greek banks and spreading contagious throughout Europe and beyond. In Washington, the U.S. Senate banking, housing and urban affairs committee held a hearing Thursday on "the global impact of a Greek default."

Failure to make a breakthrough increased the chances that Greece will have to impose capital controls on its banks as early as Monday to prevent the run on deposits from crippling the banks.

The deposit exodus has been covered by daily emergency loans from the European Central Bank. But with no agreement between Greece and its creditors in sight, the deposit outflow, which had slowed earlier this week, could well accelerate again. Some euro zone finance ministers, including Germany's Wolfgang Schaeuble, have been pushing for capital controls in exchange for more ECB loans to the Greek banks.

Even if a deal is concluded this week, the ill will between the two sides, and within Mr. Tsipras's own Syriza party, will likely ensure animosity all around. "Political and implementation risks are high, and tensions both with creditors and within the government's own majority are likely to appear, as reaching an agreement will require the government to cross some of its 'red lines,'" the French bank Société Générale said in a Wednesday morning note.

If a deal is reached in Brussels, Mr. Tsipras's problems will not be over. He is bound to run into problems. The far-left wing of Syriza is complaining that the new austerity measures that would come with a new bailout package would constitute a betrayal of Syrzia's anti-austerity campaign pledges. In a vote, he is likely to lose the support of dozens of his parliamentarians, meaning he will have to rely on votes from pro-European, pro-bailout opposition parties to get the bailout deal approved.

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How much Greece owes to international creditors

IMF

Greece was promised a total of €48.1-billion ($66.4-billion) by the global lender, of which €16.3-billion is still to come by March, 2016, if Athens successfully completes the second program. It has serviced and repaid loans on time up to this month, when it used an obscure International Monetary Fund provision to bundle together four payments totalling €1.6-billion, due to be paid by the end of June. The older IMF loans carry an interest rate of 3.5 per cent, higher than the euro zone rescue fund charges.

ECB

The euro zone's central bank holds Greek government bonds worth €19.8-billion at face value, of which €6.7-billion in July and August, posing a severe redemption or refinancing challenge for Greece. In addition, national central banks in the Eurosystem hold €7.2-billion in Greek bonds. The European Central Bank has also authorized €110-billion in emergency liquidity assistance for Greek banks from the Greek central bank, some of it secured on collateral in Greek government bonds.

Euro zone

Euro zone governments gave Greece €52.9-billion in bilateral loans under the first bailout agreed in 2010, known as the Greek Loan Facility. Under the second bailout agreed in 2012, Athens has received €141.8-billion from the euro zone's financial rescue fund and is due a further €1.8-billion by the end of this month if it meets the reform conditions.

Of the main euro zone member states, Germany's exposure for the two bailouts totals €57.23-billion, France's is €42.98-billion, Italy's is €37.76-billion and Spain's €25.1-billion. That is in addition to their contributions to the IMF loans, commensurate with their respective quotas in the global lender.

Euro zone countries extended the maturities of their loans to Greece from 15 to 30 years and reduced the interest rates on some to just 0.5 basis points above their borrowing cost. They also granted Greece a 10-year moratorium on interest payments on the second bailout loan from the euro zone rescue fund.

Reuters