Greece brinkmanship reaches crisis as loan come due

Almost five months after the Syriza-led government assumed power, the brinkmanship between Greece and its international creditors has reached dangerous levels.

After months of fruitless negotiations, Greece appears to be lurching dangerously towards a euro zone exit. This week may prove to be a decisive one in the history of the crisis.

Euro zone finance ministers gather in Luxembourg today for a meeting that has been billed as a last-chance opportunity for Greece to strike a deal with lenders.

With €1.5 billion falling due to the IMF on June 30th and repayments of up to €7 billion due to the ECB in July and August , Greece is under mounting pressure to reach an agreement.

While it is unclear if Greece can avail of an IMF 30-day grace period should it miss its IMF repayment on June 30th, a technical default would likely be declared a month later.

In any event, failure to meet its IMF loan repayments would mean that Greece would be in default to all of its troika creditors, according to the terms of the Greek bailout agreement.

The past seven days have been marked by a sharp deterioration in relations between the Greek government and creditors. The shock decision by the IMF to recall its main negotiators in Brussels to Washington last Thursday was indicative of the deteriorating state of relations. The relationship between the European Commission and the Greek government has also broken down.

Having consistently presented itself as the honest broker in the Greek negotiations, commission president Jean- Claude Juncker accused the Greek prime minister, Alexis Tsipras, this week of deliberately misleading the Greek public.

Alternative measures

The commission disputes claims by Tsipras that it is imposing “humiliating” terms on the Greek people. EU commissioner

Valdis Dombrovskis

insisted yesterday that Brussels has told Greece it is willing to discuss “alternative measures” to some of the more controversial proposals, such as VAT on electricity and medicines, as well as supplementary payments to low-income pensioners.

But behind the very public recriminations being traded by the two sides, other key players in the crisis are maintaining a quiet presence in the background. While focus today will be on the meeting in Luxembourg, the fate of Greece is more likely to be decided in Berlin and Frankfurt.

German chancellor Angela Merkel told reporters earlier this week that she "unfortunately" had nothing new to report on Greece. Ever the diplomat, Merkel said she was concentrating all her energy on helping the three institutions find a solution. "That's what I see as my task. I want to do everything possible to keep Greece in the euro zone."

The German chancellor will play a key role in determining the next stage of the Greek crisis. While she is understood to want to keep the euro zone together, she is mindful that German public opinion is hardening against further concessions for Greece. Volker Kauder, a senior member of her CDU party, and vice-chancellor Sigmar Gabriel are the latest voices to blame Greece for the standoff.

While the European Central Bank has succeeded in staying out of the limelight during the bailout negotiations, the Frankfurt-based institution continues to hold extraordinary power in the ongoing Greek crisis. Greece's banking sector is under acute pressure as deposits continue to flow out of bank accounts.

In an unprecedented move, Greece’s central bank of Greece warned yesterday that the country could leave the euro zone and possibly EU , should a deal not be agreed.

Maintain funding

The Greek banking system is being propped up by more than €83 billion of emergency liquidity assistance. While the ECB agreed to maintain emergency funding to Greece yesterday, this position could change should Greek default on any of its payments.

A failure to make the IMF repayment on June 30th, for example, would mean Greece would technically be no longer part of a bailout programme, which could prompt the ECB to declare the Greek banks insolvent and stop providing emergency funds.

Addressing the European Parliament on Monday, ECB president Mario Draghi was at pains to point out that the central bank was an apolitical body. "You're trying to portray the ECB as a political entity. We're not," he said, insisting that the central bank was simply implementing its own rules.

But whether the ECB governing council will continue to support the Greek banking sector should the country default on its repayments seems highly unlikely. As with the Irish bailout, Frankfurt is likely to play a decisive role in how the Greek crisis ultimately plays out.