Talks reach crunch time as squeeze tightens on Greece

“Received Greek request for six month extension.” So said a tweet sent at around 9.30 am this morning from the head of the euro group of finance ministers Jeroen Dijsselbloem. The brevity of the tweet was most likely no accident - the key issue is what exactly Greece is looking to have extended. Germany’s decision to almost immediately dismiss Greece’s latest position came as a surprise and casts major doubts over the ability to strike an agreement.

The drama unfolded in a few hours after Dijsselbloem’s tweet. First, it became clear that Greece has made some significant concessions. The fact that eurogroup finance ministers were then called to meet in Brussels on Friday suggested that there was at least the possibility of progress. Then came the blunt statement from the German finance ministry that what Greece was offering was not enough. On the face of if, this appears to scupper any prospects of success at Friday’s meeting.

It has emerged that the Greek government is looking to extend its “Master Financial Assistance Facility Agreement. ” This is the agreement under which the EU extends money from its rescue fund. The Greek government draws a distinction between this and the austerity programme imposed by the troika , claiming it is not seeking an extension of the bailout itself.

This is debatable, as the existing facility agreement says Greece must comply with a memorandum of understanding (MoU),which outlines the policies which must be implemented. Greece appears to have given ground, judging by the text of the letter to the eurogroup finance ministers obtained by Reuters, which indicates it will seek to complete the existing bailout programme, something on which Germany, in particular, has insisted.

It was clear from the text of the letter that Athens was looking for some change in the conditions imposed on it, but the decision to call a meeting of finance ministers suggested a feeling by the EU Commission and Dijsselbloem that agreement was possible. It appears they had not checked with Berlin.

The German finance ministry spokesman said that the letter from Athens was not a “substantive” proposal, did not promise adherence to the existing programme and did not meet the conditions set by the eurogroup. It was a blunt statement and it raises the question over whether Germany sees any possible compromise here. Politically, it was a very rapid rejection and it remains to be seen if its position will be supported in, say, Paris or Rome, given the movement made by Athens.

Europe already agreed to extend the loan facility agreement on the request of the last Greek government from the end of December 2014 to the end of this month. However there is now serious doubt over whether a further renewal can be achieved.

EU finance officials will examine the Greek request today and the finance ministers will travel for talks tomorrow. The mood music in the run up to this meeting will be fascinating. After the statement from Berlin, no doubt many ministers are wondering why the meeting was called at all.

We may not quite be at the eleventh hour yet, but we are close to the end game. The current bailout runs out at the end of this month. There is some debate about how long the Greek exchequer could last without fresh cash – but it might not be more than a month and there are already severe signs of strain in the Greek tax collection system.

However the real reason that the squeeze is now getting squeezier on Greece is the banking sector. The European Central Bank agreed on Wednesday to extent emergency liquidity assistance(ELA) from the Greek central bank to its commercial banks to €68.3 billion, a €3.3 billion increase on current levels. But this was less than Greece was looking for and will leave its banks under funding pressures as depositors continue to withdraw cash. In turn this ups the pressure on the new Greek government – and arguably sends a message to the eurogroup that some mechanism to extend Greece’s funding needs to be found, if the ECB is to allow its banks to be funded.

The ECB denied German reports this morning that its council wanted Greece to impose capital controls – limits on depositors withdrawing cash and moving funds abroad. However despite the apparent nonsense of capital controls in a single currency area, this could yet be possible if a deal is stalled and the Greek banks come under more pressure. Tiny Cyprus imposed such controls in 2013, before winding up banks and, in some cases, imposing big losses on depositors.

If there is a stand-off between Greece and Europe then the prospect of capital controls will become real. Beyond that lies the risk of Greece defaulting, its banks collapsing and an exit from the euro zone. For the moment, however, the talks go on, but the middle ground has not yet been found. Not by a long way.