Germany rejects Greek loan extension proposal

Feb 19, 2015, 3:09 PM EST
A Greek national flag, left, flies alongside a European Union (EU) flag in Athens, Greece, on Thursday, Feb. 19, 2015. Germany rebuffed Greece's request for an extension of its aid program, saying the Greek offer doesn't meet the euro region's conditions for continuing aid.
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Germany rejected Greece’s proposal for an extension of its bailout loans, setting the stage for heated last-minute negotiations. Germany said that the request fell short of the conditions expected by the rest of the Eurozone, writes the Guardian. The shock announcement from Berlin came just hours after Greece filed a formal request to its eurozone partners to extend its loan agreement, in the hope of averting a cash crisis. Eurozone ministers are due to meet on Friday in an attempt to hammer out a deal. It will be their third attempt in 10 days to resolve a standoff that has sent jitters across the continent at the prospect of a messy Greek exit from the single currency. The Greek government, which is under fire from radical ultra-leftists for making the loan application, described the latest proposal as a way to deal with the country’s “humanitarian crisis” and kickstart the economy. But the request was widely viewed as a climbdown by the Greek government.

The Wall Street Journal reports that Greece has little more than a week before its €240 billion ($273 billion) bailout expires at the end of February, leaving the government without financing and its banks at risk of being completely cut off from the lending facilities of the European Central Bank. A move to cut off Greek banks could well force Greece to leave the eurozone.

In the letter seen by Reuters, Greece pledged to meet its financial obligations to all creditors, recognize the existing EU/IMF program as the legally binding framework and refrain from unilateral action that would undermine the fiscal targets. Crucially, it accepted that the extension would be monitored by the European Commission, European Central Bank and International Monetary Fund, a climbdown by Tsipras who had vowed to end cooperation with "troika" inspectors accused of inflicting deep economic and social damage on Greece. However, the document stopped short of accepting that Greece should achieve this year a primary budget surplus, excluding debt service, equal to three percent of the country's annual economic output, as promised under the bailout deal.

Forbes writes that under the current deal Greece should start running a primary surplus of 4.5% of GDP in a year or two. Really quite an unprecedented amount and everyone’s just about willing to accept their idea that this should be reduced to 1.5% of GDP. There’s a few minor areas around like how fast should privatizations be, should the property tax be replaced with a wealth tax and so on but these are all negotiable. The one major sticking point is between “continuation” and “bridging.” And it isn’t just semantics here. Everyone accepts that we’re not going to get a complete deal before Greece falls over the edge (in about 10 days by some estimates). Everyone is also therefore accepting that there’s going to be some months of negotiations before there’s a final and complete deal. The question is, what happens in the interim? Does Greece have to keep to the whole of the current deal while they work to the end solution or are some parts of the current deal relaxed while it does? The Greeks want the latter, the Germans the former and that’s what they are arguing about.