The game of chicken between Greece and its would-be rescuers reached a crucial stage as more deadlines passed, pushing the country closer to a default that could spread debt contagion across the euro zone.
French President Nicolas Sarkozy and German Chancellor Angela Merkel urged the Greek government on Monday to accept the conditions – more austerity – for €130-billion ($170-billion) in fresh bailout funds. If Athens does not accept the terms, the loans would be withheld and Greece would default by March 20, when it must redeem €14.5-billion of sovereign bonds.
"I can't understand why we need a few more days – time is running out," Ms. Merkel said in a joint briefing with Mr. Sarkozy. She added: "A lot is at stake for the entire euro zone."
Some Greek politicians are resisting the bailout terms. They argue that piling austerity upon austerity is deepening the Greek recession, which is about to enter its fifth year, and triggering social unrest.
"I will not contribute to the explosion of a revolution due to misery that will burn all of Europe," said George Karatzafaris, the Greek parliamentarian who is leader of the Popular Orthodox Rally party.
As budget-cutting becomes the central focus of governments from Britain to Portugal, voters are fighting back. On Monday, Romanian prime minister Emil Boc, whose government has been the target of mass anti-austerity protests for weeks, announced his resignation "to ease the social situation."
Greece's biggest public- and private-sector unions called for national strikes for Tuesday. The country was paralyzed last year by dozens of strikes and mass demonstrations, some violent, as the cutbacks sent unemployment soaring.
Despite the apparent stalemate between the Greek government and the sponsors of the next bailout, the European Union and the International Monetary Fund, some common ground had been reached by the end of the weekend. Interim Greek prime minister Lucas Papademos said there were agreements on a few "basic issues," including spending cuts of 1.5 percentage points of gross domestic product in 2012, the equivalent of €3-billion, and the closing of more than 100 outdated and money-burning public-sector organizations.
But some issues remained unresolved by Monday, including bank recapitalizations, pension-plan viability, holiday bonuses and certain measures to boost Greece's competitiveness. The leaders of the three parties in Greece's unelected national unity government postponed a meeting to try to agree on the reforms until Tuesday.
The EU, the IMF and the European Central Bank (known as the troika) are putting massive pressure on Greece to implement more reform and austerity measures because the government has not met previous targets. Public-service employment levels, for instance, have not fallen as far as pledged. Greece's budget deficit, at almost 10 per cent of GDP in 2012, remains high and unsustainable.
As Greek politicians and the troika tried to come to an agreement on conditions for the new rescue package, Greece was involved in a parallel set of negotiations to reduce the face value of the bonds held by the private sector by 50 per cent. The bond restructuring, designed to reduce Greece's debt by about €100-billion, is also severely delayed. A formal agreement between Greece and the private creditors – mostly banks – must made by Feb. 13 if all the paperwork required to redeem the March 20 bond issue is to be completed.
But even if the debt-crunching effort works, Greece's debt-to-GDP ratio would fall only to about 120 per cent of GDP by 2020. It is currently almost 160 per cent. Many economists consider even 120 per cent to be unsustainable unless Greece miraculously achieves strong economic growth.
Complicating the bond negotiations is the European Central Bank. The Greek government and the IMF want the ECB to take a haircut on its Greek bond holdings along with the private investors. Barclays and UBS estimate that the ECB owns between €36-billion and €55-billion of Greek sovereign debt. Since it is not known what price it paid for the bonds, the central bank's precise losses are also not known.
Setting a precedent is the problem. If the ECB writes down the value of its Greek bonds along with the private-sector investors, the central bank might be less willing to buy the distressed bonds of other euro zone countries, such as Italy, for fear of having to take more write-downs. In a report, Deutsche Bank's economists said that "having to absorb losses might increase internal ECB resistance to [sovereign bond]interventions, reducing the exit route for private investors."
While Mr. Sarkozy said on Monday that "we can't imagine there won't be an agreement," economists said nothing is ruled out, given the tensions in Greece. "A really, really bad scenario for the euro area – a Greek default and departure from the euro area – simply cannot be ruled out," Joachim Fels, Morgan Stanley's chief economist, said in a note.