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Extra time

17 June 2015 By Hugo Dixon

The negotiations between Greece and its creditors over how to prevent the country defaulting are already in extra time. They have dragged on for so long that it might seem sensible to bring them to a swift, sharp conclusion.

However, the best chance of avoiding a disastrous blowup is to extend the talks for a little longer. This will require all participants – Athens, the euro zone countries, the International Monetary Fund, the European Commission and the European Central Bank – to maintain their cool.

The current state of negotiations is not good. Trust is low. Alexis Tsipras, the Greek prime minister, has accused the IMF of “criminal responsibility” for the country’s problems. Meanwhile, Jean-Claude Juncker, the European Commission president, has alleged that Tsipras has misled the Greek people about what the Commission has been proposing.

Thursday’s meeting of euro zone finance ministers is unlikely to achieve much. There is speculation that euro zone leaders could then meet over the weekend to hammer out a deal and, if they fail to, that Greece could be told to impose capital controls to prevent a meltdown of its banking system.

There is clearly little time left. Athens needs to repay 1.5 billion euros to the IMF on June 30 and, without a deal that unlocks cash, it will not be able to do so. It has to pay the ECB another 3.5 billion euros on July 20.

Meanwhile, Greece’s current bailout agreement with euro zone countries also expires at the end of the month. If it is not extended or replaced with a new deal, there will be no legal framework for providing extra cash to Athens. What’s more, extending the arrangement cannot be left until the last minute because some parliaments would need to approve it.

Hence, the sense is that Greece is now really on the brink.

But both sides should go the extra mile to secure a compromise, as failure would be damaging for Europe and catastrophic for Greece. As the Bank of Greece, the country’s central bank, said on Wednesday, it would turn a manageable crisis into an “uncontrollable” one.

What’s more, despite the fiery rhetoric from the Greek side, there has been some narrowing in the positions. For example, Juncker said on Wednesday that he was not in favour of Athens increasing value-added tax on electricity, until now one of the creditors’ most contentious demands.

Some of the creditors also seem flexible on another inflammatory issue: the idea that Greece should cut top-up pensions for its poorest retirees. Debate on this topic has got confused because the creditors have been asking for three things on pensions: phasing out early retirement, reductions in supplementary pensions for often reasonably well-off people and pension cuts for poor people. If they are willing to drop the latter demand, the prospects of a deal will increase.

Then there is the knotty matter of whether Greece’s huge debt burden, equal to 175 percent of gross domestic product, should be cut as demanded by Tsipras. The IMF’s chief economist, Olivier Blanchard, wrote at the weekend that it should.

Now there are clearly differences between the various creditors – especially on the issue of debt relief, to which euro zone countries are resistant. A common position, hammered out at a mini-summit in Berlin two weeks ago and then presented to the Greeks, didn’t mention the issue.

It is time for the creditors to revisit their common line. In doing so, the IMF should say that it won’t bless any deal with Greece unless the euro zone creditors offer a credible pathway to lessening its debt.

There is not enough time to conclude a comprehensive debt-restructuring package now. But the euro zone could agree that it will work towards such a deal by, say, the end of the year. Any debt relief would have to be contingent on Greece moving ahead with serious structural reforms.

Such a pledge wouldn’t be the immediate no-strings-attached cut in debt that Tsipras wants. But it would be stronger than the hedged promise to consider debt relief that the euro zone made in 2012, which has still not been acted upon.

A proposal containing these elements – a commitment to work on debt relief while abandoning the demand to push up VAT on electricity and cut top-up pensions for the poor – might just form the basis for a deal. But securing it may need a bit more time.

In practice, this means the creditors need to do three things. First, the ECB should not prematurely close down the liquidity available to Greek banks, despite the continued deposit outflow. Second, the creditors should not yet push Athens to impose capital controls. Finally, if Greece fails to pay the IMF on June 30, it should be allowed a short grace period of up to a month.

Meanwhile, Tsipras and his colleagues need to stop making inflammatory statements and start making constructive proposals. In particular, he will need to find some way of balancing his budget other than taxing electricity and cutting top-up pensions.

All this will only buy at most a few more weeks. But a few more weeks may make all the difference.


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