Greece Pins Hopes on Merkel as Rescue Talks Yield Scant Progress

Greece’s hopes of sealing an accord with its creditors by the end of May dimmed on Sunday, as disagreements between the two sides on budget targets persisted, a person familiar with the matter said.

With technical talks yielding no breakthrough, Greek Prime Minister Alexis Tsipras might seek the intervention of German Chancellor Angela Merkel and French President Francois Hollande. The three leaders are scheduled to hold a call on Sunday evening in the context of “political negotiation,” the Athens News Agency reported today, citing unidentified Greek government officials. Spokespeople for the German and Greek government declined to confirm a call would take place, while an official in Hollande’s office declined to comment.

Greece’s anti-austerity coalition has repeatedly expressed confidence that an agreement to unlock bailout funds and avert default is within reach, only to be rebuffed by officials representing euro-area member states and the International Monetary Fund. The standoff over the terms attached to emergency loans has triggered a liquidity squeeze and record deposit withdrawals, tipping the economy back into recession.

“The positive statements from Athens are necessary to mitigate the pressure on deposit outflows,” said Ricardo Garcia-Schildknecht, an economist at UBS AG. “Our baseline view remains an agreement, but negotiations are set to remain difficult, with more pressure probably needed.”

Greek Uncertainty

With negotiations now in their fifth month, creditor institutions are seeking concrete action in areas including the pension system, labor market and sales tax.

The biggest hurdle is their insistence on additional fiscal measures of as much as 3 billion euros ($3.3 billion), a Greek official with knowledge of the matter said. The official asked not to be named, as negotiations are private and ongoing.

Greek shares were little changed in May, with the benchmark Athens Stock Exchange index gaining 0.3 percent, as local reports of progress were followed by stark warnings from European officials about the risks of impeding default.

The nation’s bonds delivered a 0.36 percent return in the last month, according to Bloomberg’s market-value weighted index of the country’s sovereign notes. With the European Central Bank’s bond-buying program, or quantitative easing, no longer fueling the market, Europe is at risk from Greek pain, said Ilya Feygin, Managing Director at WallachBeth Capital.

“The uncertainty and delay in the Greek agreement, coming after optimistic comments earlier in the week, definitely hurt all European markets on Thursday,” he said by e-mail on Sunday. “A negative outcome in the Greek negotiations would come at a very bad time for Europe with economic data on the weak side and QE no longer pushing down the euro and bond yields.”

Technical Solution

Government spokesman Gabriel Sakellaridis had told reporters in Athens on May 28 that a deal with creditors could be reached by Sunday. “This optimism is not just words, it is based on the experience of the previous weeks and the progress achieved,” Sakellaridis said.

Economy Minister George Stathakis said in an interview with Italy’s Corriere della Sera that he expects a “technical solution” will be found with Greece’s creditors “in a few days.” The accord would be followed by a meeting of euro-area finance ministers to free up resources.

With just four weeks before a euro-area-backed bailout expires, Finance Ministry officials have told Greece there’s not time to get a disbursement approved by the currency bloc’s parliaments unless they reach at least a technical agreement by the beginning of June.

Failure to strike an agreement risks leaving Europe’s most indebted state unable to meet its debt obligations. They include four payments totaling almost 1.6 billion euros to the IMF in June. Stathakis told Corriere that there will be no problem with the first payment due to the IMF on June 5.