Rebecca Christie writes: Euro-area leaders and finance ministers meet Tuesday in Brussels to discuss how Greece can stay in the common currency. It’s the first round of serious talks since Greek voters resoundingly rejected the terms of a prior bailout offer that expired on June 30.
Prime Minister Alexis Tsipras said his government wants debt restructuring as part of its next aid package.
In the short term, Tsipras and his new finance minister Euclid Tsakalotos arrive in Brussels with their main goal will be to start talks on bridge financing, to help Greece get past its upcoming financing hurdles.
Tsipras also asked for a two-year loan from the European Stability Mechanism, the euro-area’s firewall fund.
July 20th Greece needs to pay about 3.5 billion euros ($3.9 billion) in bond redemptions for securities held by the European Central Bank. Greece needs short-term cash before then, or else an expanded lifeline from the ECB to its financial system.
That said, Greek banks have already been shut for more than a week because of their cash crunch. The ECB has mostly left intact its lifelines to Greek banks but it tightened conditions on emergency liquidity assistance.
The ECB’s Governing Council has declared it will work closely with the Bank of Greece to maintain financial stability. Also, the ECB’s aid isn’t likely to be withdrawn abruptly.
Talks on debt relief are likely to be political rather than practical. Greece’s biggest short-term bills are to the IMF, the ECB and its workers, which can’t be restructured easily.
In the longer term, the euro area could ease Greece’s overall debt burden considerably by lengthening the terms and lowering interest rates on some existing rescue loans. This has been on the table since 2012, but the Greeks haven’t persuaded the euro area to make good on the offer so far.
German Chancellor Angela Merkel has insisted that Greece can’t get any money for free and must meet euro-area rules to win assistance. French President Francois Hollande has led the side of conciliation, urging everyone to stay at the bargaining table.
Convincing the German leader will be a tough sell.
As long as politicians keep talking, the ECB won’t want to cut off Greek bank aid — which is the main thing holding the country’s finances up.
EU leaders say the Greeks are in a weaker position after the prior program — and its related offers of extension, short-term cash and debt relief — expired. Tsipras disagrees. If the Greeks hold firm, they could be heading for the exit.
If negotiations are formally broken off, the ECB may feel obliged to veto further liquidity to the banking system, a move that would probably lead to a broad-based default.
If a political breakdown doesn’t cause the ECB to reach for the trigger, any non-payment of the money Greece owes to the ECB on July 20 almost certainly would.
The euro area could decide to help Greece to an orderly exit, through a phased withdrawal of liquidity or some other settlement mechanism. It could also put Greece’s euro membership on temporary suspension, a prospect raised over the weekend by German Finance Minister Wolfgang Schaeuble.
As part of its efforts to protect the currency bloc, the ECB has said it’s ready to protect other countries from contagion.
