Germany Rejects Greek Bailout Extension

FINANCIAL TIMES

February 19, 2015

Germany Rejects Greek Bailout Extension

Peter Spiegel in Brussels, Stefan Wagstyl in Berlin and Claire Jones in Frankfurt

Germany has rejected a request by Athens to extend its €172bn bailout despite a significant u-turn by the new Greek government, which for the first time on Thursday promised to work on completing the economic reform measures required by the current rescue programme.

Martin Jäger, a spokesman for Germany’s finance ministry, said the letter requesting the extension, sent by Greek finance minister Yanis Varoufakis on Thursday, left too many questions unanswered and did not meet demands by eurozone finance ministers to unconditionally agree the terms of the existing rescue.

“The letter from Athens is not a substantive proposal for a solution,” Mr Jäger said. “In truth, it aims at bridge financing without fulfilling the demands of the programme. The text does not meet the conditions agreed on Monday in the Eurogroup.”

The swift rejection by Berlin after what many viewed as near complete capitulation by Athens is just the latest in a series of breakdowns over how to keep the Greek government financed when the current EU programme expires next week.

But coming at the 11th hour it raises the prospect that Athens will enter March without EU financial support for the first time since May 2010, which many eurozone officials fear will spark market panic and a possible bank run.
Jeroen Dijsselbloem, the Dutch finance minister who chairs the committee of his 18 eurozone counterparts, has said a deal on an extension must be reached by the end of this week.

The German rejection came as a surprise after Mr Dijsselbloem earlier in the day announced he had received a request for a six-month extension and would convene a meeting of eurozone finance ministers at 3pm in Brussels on Friday.

Eurozone officials had said a new meeting of the Eurogroup would not be held unless Greece had made enough concessions to warrant a third Eurogroup in the last week.

According to a copy of the Greek request obtained by Reuters, which eurozone officials confirmed was authentic, Mr Varoufakis was seeking an extension of Greece’s “master financial assistance facility agreement” – the same request that was made by the previous government of Antonis Samaras in December.

At the same time, Mr Varoufakis says in the letter that he seeks to go forward with the current bailout only after a discussion on “proposals of, on the one hand, the Greek government and, on the other hand, the institutions,” an indication he was seeking modifications of the bailout conditions before signing onto an extension.

Until now, Greek authorities have refused to accept an extension of the current bailout agreement, insisting the new government was elected to end its economic and financial strictures. But a German-led group of eurozone countries said they would not consider a new programme for Greece unless it completed the current one, which without an extension is due to expire at the end of next week.

Mr Varoufakis’ request came just hours after the European Central Bank’s governing council approved an extension of its emergency funding to Greece’s banks on Wednesday evening on the expectation that Athens and its creditors will reach an extension deal in the Eurogroup by Sunday.

The ECB’s top officials and the heads of the central banks of the eurozone’s 19 members approved a €3.3bn increase in Emergency Liquidity Assistance for Greek banks in their Wednesday meeting.

Some members of the governing council believe that if a solution is not agreed between Greek officials and the Eurogroup by the end of the week, the ECB might then have to review the solvency of Greek banks. The approval of the latest increase lasts for two weeks, but ELA can be reviewed at any time. A two-thirds majority of the governing council’s 21 voting members would be needed to end ELA – a “nuclear option” that would effectively force Greece to adopt capital controls or quit the currency area.

In a sign of the ECB’s concern about the prospects of a deal, the decision to increase ELA by €3.3bn came despite a request from the Bank of Greece for €10bn in ELA earlier this week. The ECB’s executive board instead presented a proposal to the rest of the governing council on Wednesday to sanction the smaller increase, which takes the total amount of emergency support on offer to €68.3bn.

The ELA is providing a lifeline to Greek lenders, which have suffered from a spate of deposit withdrawals and the ECB’s decision to scrap a waiver that allowed them to use Greek sovereign debt as collateral for the central bank’s regular loans.

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