Germany quickly rejected a conciliatory bailout proposal by Greece on Thursday, dampening hopes that emergency talks might break a deadlock threatening the country with default and an exit from the euro.
The Greek government asked to extend its rescue loan agreement by six months, in order to give all sides more time to hash out a more permanent deal. That goes much of the way toward satisfying an ultimatum from the 19-country eurozone.
It held back, however, on offering to continue implementing a full a series of budget cuts and reforms that the eurozone has required since 2010 in exchange for loans, but that Greece blames for devastating its economy.
Germany was quick to say the plan was not good enough. German finance ministry spokesman Martin Jaeger said it “is not a substantial proposal for a solution.”
He said it amounts to a request “for bridge financing without fulfilling the demands of the (bailout) program,” namely the budget measures. It does not, he added, correspond to what the eurozone countries had demanded of Greece before talks broke down on Monday.
Prime Minister Alexis Tsipras had a 50-minute phone conversation with German Chancellor Angela Merkel Thursday evening, with a Greek official saying the discussion was “in a positive climate and in the direction of finding a mutually beneficial solution for Greece and the eurozone.”
The executive European Commission was somewhat more upbeat than Germany.
Spokesman Margaritis Schinas said Commission President Jean-Claude Juncker “sees in this letter a positive sign which, in his assessment, could pave the way for a reasonable compromise in the interest of financial stability in the euro area as a whole.”
He said Juncker held talks with Tspiras and Dutch Finance Minister Jeroen Dijsselbloem, who will head Friday's emergency meeting of eurozone finance ministers in Brussels.
France also said it was working to ensure Greece remains in the joint currency.
“France is working and will keep working so that Greece keeps its place in this Europe,” Prime Minister Manuel Valls said.
“We must respect the choice of the Greek people.” At the same time, Valls said, “the new Greek government must also put itself fully and durably within this Europe and the euro Greece so needs.”
A text of Greece's letter shows it proposing:
—A six-month extension to the country's rescue loans
—Starting work on a new financial support deal “between Greece, Europe and the International Monetary Fund” which could eventually replace the current bailout agreement
—Easing repayment terms on Greece's existing 240 billion euros in bailout loans. That would be based on an old offer by the eurozone to extend repayment dates and lower interest rates once Greece achieves a budget surplus — excluding the cost of debt interest. Greece has achieved such a surplus.
—A promise to honor all of Greece's debt obligations
—No unilateral actions by Greece “that would undermine the fiscal targets, economic recovery and financial stability”
—Any new measures to boost economic growth would not cost new money.
—Supervision of Greece's reforms by the IMF, European Central Bank and the EU — the three institutions whose representatives as debt inspectors the new Greek government has refused to deal with.
The proposal includes no mention of continuing the series of budget cuts and reforms the eurozone has required since 2010 in exchange for the rescue loans. Germany insists on those measures, which are likely to remain a key point of debate in the talks on Friday.
In a possible concession to the eurozone, Greece's proposal doesn't specifically mention the government's key pre-election pledge of seeking forgiveness for most of its debts.
In a thinly-veiled response to Germany, Greek Deputy Prime Minister Giannis Dragassakis said: “At this moment it appears that there are powers that would like Greece on its knees, exactly so they can impose their will.”
Analyst Evangelos Sioutis, head of equities at Guardian Trust Securities, said a rift with Greece's creditors would be in nobody's interest, but warned a deal is needed fast.
“If there's no agreement in the next few days there is a risk of (a bank run) because liquidity in Greek banks is very limited and there are many who say that capital controls are very close,” he said. “There must be an agreement in the next few days.”
The European part of Greece's bailout expires on Feb. 28. If no deal is reached by then, the European Central Bank would face increased pressure from eurozone governments to cut off emergency financing for Greek banks.
That could place so huge a strain on the country's financial system that the government might be forced to print its own currency and leave the euro — a worst-case scenario for all sides. European countries could be stuck with losses on their loans to Greece, which would suffer terribly, at least in the short term.
A new Greek currency would immediately drop in value, pushing up the cost of imported fuel and key consumer goods. That would take a terrible toll on a society where poverty levels have surged, the average income has fallen by at least a third and one in five workers are unemployed — mostly long-term.