(Bloomberg) — European leaders talked openly about a Greek exit from the euro ahead of a weekend summit on the country’s economic future, breaking dramatically with years of denial about the possibility.
Europe has “a Grexit scenario prepared in detail,” European Commission President Jean-Claude Juncker said late Tuesday night, hours before Austrian Chancellor Werner Faymann said Greece’s Plan B is “another currency.” The European Union set a Sunday deadline to reach a deal with Greece on a rescue in exchange for austerity measures and economic reforms, while the country formally requested a new three-year bailout.
The continent’s most indebted country is closer than ever to being forced to abandon the euro after its people voted decisively in a July 5 referendum to reject spending cuts and tax hikes. Greece’s banks are almost out of cash and its economy is grinding to a halt after Prime Minister Alexis Tsipras imposed capital controls to stem withdrawals, and could collapse entirely without a new lifeline from the European Central Bank.
“Our inability to find agreement may lead to the bankruptcy of Greece and the insolvency of its banking system,” said EU President Donald Tusk. Failing to find a deal “will mean the end of the negotiations with all the possible consequences, including the worst-case scenario where everyone will lose.”
Sunday now looms as the climax of a five-year battle to contain Greece’s debts, potentially splintering a currency that was meant to last and throwing more than half a century of European economic and political integration into reverse. German Chancellor Angela Merkel, whose country is Greece’s largest foreign creditor, said she is “not especially optimistic” about finding a solution.
Tsipras was in Strasbourg Wednesday as part of his last-ditch campaign to keep Greece in the euro, which he’s said is his highest priority.
His government sent a formal request for a new bailout to the European Stability Mechanism, the body that co-ordinates financial assistance to member states. The document asked for a three-year loan facility, and said reforms to taxes and pensions would be implemented starting next week.
“The Greek people didn’t deliver a mandate for rupture; they reinforced the mandate for a lasting and just solution,” Tsipras told the European Parliament. “My country was turned into a laboratory experiment of austerity. We have to admit that the experiment failed.”
The reaction of financial markets to the Greek turmoil has been muted, potentially giving creditors a stronger bargaining position. The euro was little changed at $1.1016, while the benchmark Stoxx 600 index rose 0.2 percent as of 12:56 p.m. in Brussels.
The path to a euro exit by Greece is unclear. European law treats the euro as “irrevocable” and makes no provision for a country to leave or be pushed out. The likeliest exit mechanism would be for European governments to halt aid to Greece, leading the ECB to stop supplying euros to the country’s banks.
The ECB will end its support for Greece if “there is no political accord in sight,” board member Christian Noyer said Wednesday in an interview on Europe 1 radio. “Our rules force us to stop completely. We’re starting to be very worried.”
In that event, Greece would be forced to issue IOUs or some other medium of exchange, leading gradually to the creation of a parallel currency to replace scarce euros.
To avoid that outcome, by 8:30 a.m. on Friday Greece must spell out how it will make its economy more competitive and save money in the process. Proposals acceptable to European leaders will almost certainly require it to stomach many of the reforms that Tsipras’s Syriza has resisted since coming to power in January, and which Greeks repudiated in their referendum.
Expert assessment of that package would feed into a final set of meetings, culminating in summits of both euro-zone leaders and the broader 28-nation EU on Sunday.
“This is the big one,” Malcolm Barr, an economist at JPMorgan Chase & Co. in London, said in a report to clients. “The ‘good’ news for Greece is that it is being given a clear opportunity to put its proposals in a concrete form and have them evaluated by the rest of the region.”
Tsipras will have few sympathizers at the summit. Germany, the Netherlands and Finland have anchored the tight-budget camp since the debt crisis broke out in 2010; Ireland and Portugal observed strict conditions to complete their own aid packages and are loath to see Greece get off more easily.
Among large EU countries, only the government of France is striking a more dovish tone toward Greece. French President Francois Hollande has warned about the consequences of setting Greece adrift, and said his motto for handling the Greek crisis is “responsibility, solidarity, speed.”
–With assistance from Rebecca Christie, Ian Wishart, Corina Ruhe, Karl Stagno Navarra, Marine Strauss and Stephanie Bodoni in Brussels, Arne Delfs in Berlin, Eleni Chrepa, Nikos Chrysoloras, Marcus Bensasson and Paul Tugwell in Athens and Constantine Courcoulas in Istanbul.