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 In this modest Brussels setting last Friday morning, key players in
the great Greek debt drama tried to avert a meltdown that could
threaten the future of the euro and even the European Union (EU).
Merkel and Hollande made a final offer of billions of euros in aid
for bankrupt Greece – if Tsipras would sign up to economic reforms
demanded by his country's creditors.
The participants looked tired, their body language was stiff. The
meeting did not last long. Tsipras, according to Greek officials
close to the negotiations, had already decided to call an emergency
meeting of his cabinet in Athens for that evening. Even as he spoke
with Merkel and Hollande, he was preparing to hand the decision over
Greece's fate to the nation's voters. The day before he had decided,
after months of talks, that he and Greece's creditors were unable to
agree a deal.
As he flew home to Athens later that day on a government plane, the
young Greek leader settled on the idea of a referendum, according to
the Greek officials. Staging a full-scale election would take too
long, he had been advised. But a referendum could express the will
of the Greek people.
He informed ministers of his plan, the cabinet approved it and he
announced the referendum in a late night television broadcast. The
abruptness of the move took some European leaders by surprise.
Merkel and Hollande were told of it by telephone shortly before
Tsipras announced it.
The bombshell said much about the long-running struggle between
wayward Greece and the megalithic European Union, a struggle beset
by blunders and serial brinkmanship. As this account details, all
parties had their flaws and misjudgments.
At stake is far more than money. The Greek problem cuts to the heart
of Europe's future. In Tsipras' eyes it is a crisis of democracy and
sovereignty, of whether the wishes of a nation state outweigh the
aims of the supra-national euro zone and EU.
For the euro zone – and Germany in particular – it is a test of
unity, of whether countries within the 19-nation single currency
bloc that fail to meet its economic standards and agreed rules can
be brought into line, or not.
Tsipras' call for a referendum infuriated finance ministers from the
euro zone, whose meetings are known as the Eurogroup. They and the
International Monetary Fund (IMF) had previously rescued Greece from
its mountainous debts with massive bailout program; the latest was
due to end on June 30, when Greece also had to pay 1.6 billion euros
to the IMF.
Patience exhausted, the Eurogroup decided last weekend to let the
bailout program expire as scheduled. The European Central Bank (ECB),
which was keeping Greek banks afloat with 89 billion euros of
emergency funding, also decided enough was enough: it said it would
give no further emergency funding.
In Greece fearful citizens queued to take cash out of ATMs. Tsipras
and his government ordered Greek banks to stay shut and imposed
capital controls to stop funds leaving the country.
On Tuesday Greece failed to make its payment to the IMF. Though
talks between the various parties continue and a deal may still be
struck, Wednesday dawned with Greece adrift - with no recourse to
further funding from the IMF or the bailout program.
The referendum is due on July 5, though rumors circulated on
Wednesday that it might be canceled. If it does go ahead, Greek
voters face a stark choice: Give in to their creditors and accept
painful economic reforms, or go their own way. The latter course,
some European leaders have made clear, will amount to a decision to
quit the euro zone – though Tsipras disputes that view.
This account, based on interviews with people close to the
negotiations, shows how the debt crisis became a political one. None
of the main players would speak to Reuters on the record.
A CROSSROADS
From the moment he became Greek prime minister in January, Tsipras,
40, posed a novel challenge to the well-cut suits of Brussels. Bold
and inexperienced, he had no fear of defying convention - not for
him any necktie, no matter who he was meeting. His finance minister,
Yanis Varoufakis, was inclined to leather jackets, blunt language
and radical ideas.
Though Tsipras' style was casual, his resolve was steely. As talks
on Greece's debts dragged on, he held firm to the core demands of
his leftist Syriza party for debt relief – allowing Greece not to
repay some of the billions it had borrowed - and an end to
austerity.
Tsipras, who had flirted with communism in his youth, cast the debt
crisis more as a political issue than a problem of number-crunching.
Europe, he wrote in French newspaper Le Monde at the end of May, was
"at a crossroads." Either it showed solidarity and granted Greece an
easier ride, or it would face division and "the beginning of the end
for the European unification project."
That was his bargaining chip: If the euro zone leaders did not cave
in, Greece could cause chaos by defaulting on its loans. Greece owes
its official lenders 243 billion euros ($271 billion), according to
a Reuters calculation based on official data. Germany alone accounts
for 57 billion euros in two bailout programs. Germany is also the
biggest shareholder in the European Central Bank (ECB), which has
provided 118 billion euros in liquidity to Greek banks, the bank's
head Mario Draghi recently said.
Tsipras' chief opponent was Merkel, long-standing leader of Germany,
seen by some as a bastion of financial rectitude. Merkel and her
combative finance minister, Wolfgang Schaeuble, did not believe
Germany should pay any more for Greece's economic mistakes. Not all
creditors agreed: Some were sympathetic to Tsipras' call for debt
relief.
One of Merkel's main objectives, according to a senior German
official, was to get creditors and other institutions to take a
united position. Berlin suspected the EU Commission – the executive
body running the EU – was willing to give too much ground to Greece
to hold the euro zone together.
The Germans fretted that Jean-Claude Juncker, the Commission's
president, might be too amenable to Tsipras. When Juncker had met
the newly-elected Tsipras in February, he had greeted him with a
kiss and led him off by the hand to a meeting. One senior German
official joked: "If Juncker could decide for himself, we would have
a pure financial transfer (of money from Germany and other
countries) to Greece for the next 10 years."
The Germans and their northern creditor allies repeatedly pointed
out that the Commission does not provide loans to Greece. It is the
member states who lend the money and call the shots.
Merkel was also at odds with the IMF, which thought further debt
relief for Greece should be considered. Merkel told Christine
Lagarde, the IMF's managing director, that it was essential for
Germany that the IMF remain engaged in the Greek bailout program,
according to two persons briefed on their discussion. But the German
chancellor ruled out what many economists, and the Greek finance
minister, saw as the most practical solution to Greece's immediate
cash crunch. That idea was to allow the euro zone's bailout fund,
the European Stability Mechanism (ESM), to pay off the loans from
the IMF and to take over Greek government bonds held by the ECB.
Both sets of debts could be replaced with lower-rate, longer-term
loans from the ESM.
Merkel told Lagarde the idea would be unacceptable to Berlin and to
others in the euro zone, according to a person familiar with the
German position.
Whether Tsipras felt emboldened by divisions among Greece's
creditors is unclear. He played his cards close to his chest.
Compounding the difficulties on the Greek side was the fragmented
nature of Tsipras' ruling party, Syriza, an assemblage of leftist
factions, some passionately opposed to any deal involving austerity.
Alexis Mitropoulos, a Syriza member and deputy parliamentary
speaker, described one set of creditors' proposals as "the most
vulgar, most murderous, toughest plan."
"LOOTING"
As endless meetings came and went, both sides refused to give much
ground. Tsipras ratcheted up the rhetoric, accusing Greece's
creditors of "five years of looting under the bailouts." Greece, he
said, would wait until the creditors recognized the will of the
Greek people to end austerity. "We do not have the right to bury
European democracy at the place where it was born," he said.
On the other side, some EU officials wondered whether Tsipras wanted
to reach a compromise at all. The Greek government repeatedly sent
its proposals or responses too late to be analyzed by experts of the
EU, ECB and IMF before ministerial meetings, raising suspicions that
it wanted to avoid scrutiny of fiscal measures that did not add up.
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The creditors saw chaos looming. They hurriedly agreed to hold an
emergency summit at which political leaders – not officials – would
discuss the crisis. It was a goal Tsipras had been seeking.
Events, though, had a momentum of their own. Fearful Greeks were
pulling their money from Greek banks. Between last October and
April, about 30 billion euros had flowed out. Now the pace
quickened: In just a week, depositors yanked some 4 billion euros
out of Greek bank accounts.
The governor of Greece's central bank, Yannis Stournaras, summoned
senior bankers to a special meeting. According to two of those
present, Stournaras issued a dire warning. "If there is no deal, the
Europeans will have decided to move on – (that) is what we were
told," said one of the bankers. In other words, if there was no
deal, Greece would default, go bust and maybe crash out of the euro.
A spokesman for the central bank confirmed that the meeting took
place but declined to comment on what was discussed.
A "TOMBSTONE"
Faced with time running out and the possibility of banks closing
their doors, Tsipras began contemplating concessions to Greece's
creditors, according to aides. One of the main sticking points was
the pensions system. The IMF insisted that Greece overhaul its
pension system to reduce the burden on the state, people familiar
with the negotiations said.
Pensions gobbled up 17.5 percent of Greece's GDP in 2012, according
to Eurostat, more than any other EU country. Despite subsequent
cuts, the country still spends 16 percent of its GDP on pensions –
though that's partly because Greece's GDP has fallen. Creditors say
the system is fundamentally flawed, creating perverse incentives for
Greeks to retire early, draw a pension and then work in the shadow
economy, depriving the government of revenue.
The IMF wanted that to change. Tsipras resisted, saying that high
unemployment meant that pensions were a vital source of income for
many families.
On Sunday June 21 he met Syriza colleagues in Athens to thrash out a
new deal to present to creditors. "Tsipras was in and out of the
meeting room," said a deputy minister. "He spoke several times by
phone to other EU leaders and some policy makers during the meeting.
That's why it lasted so many hours."
Late that night Tsipras' team sent new proposals to euro zone
officials in Brussels. But they arrived too late for proper
consideration at a summit scheduled for the next day, according to
EU officials.
Still, after months of wrangling there was mood of optimism as
European leaders gathered in Brussels on June 22. President Francois
Hollande of France flew in on a Falcon jet and was upbeat, despite
headlines such as "Europe on a knife-edge" and "Greece Bust." As a
person on the plane familiar with the president's thinking told
Reuters: "It's always at the last moment that people find solutions
that seemed difficult to imagine at the start."
The same source added a note of caution. "This drama has a risk too,
and that's that people may find themselves in a real Greek tragedy,
with a death at the end. Possibly several."
True to the warning, talks did not go well. Tsipras gave some ground
on pension reforms, but he focused on increasing pension
contributions and taxes rather than cutting spending. Creditors
wanted more cuts.
German finance minister Schaeuble remained unconvinced. "There is
nothing new beyond many trying to create expectations which are not
supported by substance," he told reporters. Once again discussions
descended into disagreement and acrimony.
Ordinary Greeks also reacted angrily. As word of Tsipras' proposals
reached Athens, impoverished pensioners protested in the streets.
Leftist lawmaker Yannis Michelogiannakis decried the proposed
reforms as a "tombstone" for Greece, asking: "How can you cut a deal
that will increase suicides and make people poorer?"
With creditors insisting on tougher measures, Tsipras began
considering putting the issue to voters. "We realized ... that there
was no will to reach a deal on a viable solution," said a Greek
official.
On June 26, Tsipras met Merkel and Hollande in the small room in the
French delegation offices in Brussels. Merkel and Hollande dangled
the prospect of more than 15 billion euros of loans in installments
over the next five months if Tsipras agreed to creditors' proposals.
Almost all of that money, though, would simply go to meet Greece's
debt repayments, and none of it was new cash not already committed
under the bailout program. Greeks would still face years of
austerity and economic reform.
Tsipras spurned the offer and accused the creditors of "blackmail"
in a press conference with reporters.
WEIGHTY DECISION
When he announced the referendum, Tsipras hoped the European
institutions would grant some respite from financial pressures until
the vote could be held. He asked for Greece's bailout program to be
extended beyond July 5.
France was willing to discuss the idea, euro zone officials said.
But other finance ministers refused. "That (calling a referendum) is
a sad decision for Greece," said Jeroen Dijsselbloem, president of
the Eurogroup. "It has closed the door on further talks while the
door was still open, in my mind."
Schaeuble was blunter: "The negotiations are clearly ended, if I
understand Mr Tsipras correctly. We have no grounds for further
discussions."
Early that evening Varoufakis, the Greek finance minister, left the
EU Council building in Brussels. According to several participants
in the Eurogroup, he went with a smile. "It was disturbing that
someone who has just made a decision against his country, is not
devastated, but grins," said an EU official.
The following day, Varoufakis posted a blog entry defending the
referendum. "The very idea that a government would consult its
people on a problematic proposal put to it by the institutions was
treated with incomprehension and often with disdain bordering on
contempt," he wrote. "Can democracy and a monetary union coexist? Or
must one give way?"
In Berlin, government officials noted that Schaeuble had suggested
the idea of a Greek referendum back in May.
Greek officials close to the talks said negotiations could continue
despite the expiry of the bailout program and the referendum. For
now, though, Greek banks remain closed. Efforts to find a compromise
continued, though on Wednesday Merkel showed little sign of giving
ground.
EU Commission president Juncker has made plain the stakes as he sees
them in a referendum. On June 29 he told a news conference: "The
whole planet would take a Greek 'No' ... to mean Greece wants to set
itself apart from the euro zone and from Europe."
He said he would ask "the Greek people to vote 'Yes,'" advising that
they should not "commit suicide."
(Maltezou reported from Athens; Pineau from Paris; Rinke from
Berlin; Additional reporting by Deepa Babington, Lefteris Papadimas,
George Georgiopoulos, Karolina Tagaris and Michele Kambas in Athens;
Ingrid Melander in Paris; Paul Taylor, Jan Strupczewski, Philip
Blenkinsop and Alastair Macdonald in Brussels; Erik Kirschbaum,
Sabine Siebold and Noah Barkin in Berlin; John O'Donnell in
Frankfurt; Written by Richard Woods; Edited by Simon Robinson)
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