More defiant than ever, Greek Prime Minister Alexis Tsipras used a parliamentary speech to raise the game of brinkmanship with Greece's creditors to an unprecedented level, even though the cash-starved government faces a debt default in two weeks.
In his speech, Mr. Tsipras lashed out at Greece's creditors – the International Monetary Fund, the European Union and the European Central Bank – for allegedly using harsh austerity to choke the life out of the Greek economy. He was particularly scathing about the IMF, which he said bore "criminal responsibility" for the country's dire economic state.
"The time has come for the IMF's proposals to be judged not just by us but especially by Europe," he said on Tuesday. "Right now, what dominates is the IMF's harsh views on tough measures, and Europe's on denying any discussion over debt viability."
He added that the creditors seemed determined "to humiliate an entire people."
Various reports said that Mr. Tsipras, in a meeting earlier on Tuesday with Stavros Theodorakis, leader of the opposition To Potami party, in effect threatened to use default as a negotiating tactic. "The government will not pay the IM if, by the end of the month, an agreement hasn't been achieved with lenders," he reportedly told Mr. Theodorakis.
Greece recently delayed a €300-million ($415-million) payment to the IMF. It said it would bundle the delayed payment, along with three others, worth a total of €1.6-billion, and pay the entire amount at the end of this month. But Greece would find it close to impossible to make the payment unless an agreement is struck with the creditors that would allow the country to receive €7.2-billion in funds remaining from the existing bailout agreement.
Analysts said that Mr. Tsipras, backed by his combative Finance Minister, Yanis Varoufakis, are playing a high-stakes game based, apparently, on their belief that German Chancellor Angela Merkel will back down at the last minute and cut an austerity-lite deal in exchange for fresh bailout loans.
"Tsipras is convinced that Merkel will relent," said Nicholas Spiro, managing director of the London debt consultancy Spiro Sovereign Strategy. "He's gambling that she does not want to be seen as the chancellor who let Greece go and break up the euro zone."
Ms. Merkel on Tuesday told reporters in Berlin that she had nothing new to report on the talks with Greece, which have stalled to the point that neither side is talking to one another. But she said she would "do everything possible to keep Greece in the euro zone. I'm concentrating all my energy on helping the three institutions find a solution."
While Ms. Merkel has struck a conciliatory note, some powerful members of her government have clearly lost patience with Greece. Several recent polls suggest that slightly more than half of Germans want Greece out of the euro zone.
German Finance Minister Wolfgang Schaeuble has said he's willing to accept a Greek exodus if a compromise proves elusive. On Tuesday, another senior member of Ms. Merkel's Christian Democratic party, Michael Grosse-Broemer, the deputy floor leader in Parliament, said that "in the event a solid reform package is not presented, then a Grexit would have to be accepted, if necessary. … I am not sure any more if the Greek government is really interested in averting damage for the people of Greece."
Mr. Varoufakis has said that Greece's exit could unleash economic contagion with potentially devastating results for the rest of the euro zone. While the negotiating standoff has certainly contributed to market volatility in recent days, the markets outside of Greece have not suffered greatly. On Tuesday, the FTSE-100 was flat and the Eurofirst 300, which represents the biggest European companies, was up. The euro lost 0.4 per cent but is up more than 2 per cent in June. The biggest losers have been the Greek banks, which are seeing their deposits disappear as the threat of default rises.
Jens Nordvig, head of fixed-income research at Nomura Securities, said the news flow out of Greece is not damaging the euro greatly. In a note, he said: "By now, it is pretty clear that the euro zone is much more resilient to internal shocks than in 2010. Hence, even if we experienced a Grexit-type scenario, the domino theory of uncontrolled contagion among the rest of the region is likely to prove mostly scaremongering, partly a tale told by the European establishment to keep the euro together."
Mr. Spiro said the contagion threat might be overblown, weakening the Greek negotiating position. "If there is a time to force Greece out of the euro zone, it's now," he said. "Investors believe the ECB has their back."
Greece has said it will not present a new proposal at the meeting of the euro zone finance ministers, known as the Eurogroup, on Thursday. As the Eurogroup meets, Mr. Tsipras will be attending the St. Petersburg International Economic Forum, Russia's answer to Davos. While Greece still insists it wants to stay in euro zone, Mr. Tsipras's St. Petersburg appearance might be designed to suggest to the EU that Greece might be able to find a new patron in the form of Russia if it were to leave the euro zone voluntarily or by accident.