Greek crisis: Athens rejects capital controls report as Draghi calls for deal 'very soon'

Graeme Wearden

from on 2015-06-15 20:59 (#BA35)

Dramatic day sees traders are spooked by collapse of negotiations last night, PM Alexis Tsipras vows not to cave in, and German media reports of an emergency ultimatum.

9.59pm BST

And that's all for tonight, after a day that began with the EU and creditors blaming each other for the collapse of talks last night...

....followed by Tsipsas's claim that lenders were driven by ""political purposefulness" after years of looting....

9.52pm BST

Alexis Tsipras's pledge early this morning to resist any more looting by its creditors makes the front page of tomorrow's FT:

Tuesday's FT: Tsipras vows to resist 'pillaging' of Greece in blow to deal prospects #tomorrowspaperstoday #bbcpapers pic.twitter.com/ofr4zdZ5Kh

9.37pm BST

The Daily Telegraph reports that Greece could potentially ask the European Court of Justice to protect it.....

Germany's Suddeutsche Zeitung reported that the creditors are drawing an ultimatum to the Greeks, threatening to cut off Greek access to the European payments system and forcing capital controls on the country as soon as this weekend. The plan would lead to the temporary closure of the banks, followed by a rationing of cash withdrawals.

Syriza sources have told the Telegraph that Greece may seek an injunction from the European Court of Justice to stop the creditors and the EU institutions acting in a way that breaches Greek treaty rights. This would be an unprecedented move, greatly complicating the picture.

Syriza sources tell @AmbroseEP Greece may seek ECJ injunction to stop EU institutions breaching treaty rights http://t.co/rfllExsN9s

9.11pm BST

The FT has a rather unsympathetic quote from one of Greece's creditors tonight:

According to a copy of Greece's counter-proposal presented to Mr Juncker's staff at the weekend and obtained by the FT, Athens agreed to meet the creditors' demands on budget surplus targets for this year and next year. For 2015, Athens said it would reach a primary budget surplus of 1 per cent and 2 per cent in 2016 - something the Greek government has resisted for nearly two weeks.

But officials representing Greek creditors said many of the underlying fiscal measures - particularly the a2.4bn in savings attributed to "administrative measures" - were unlikely to be met, making the promise to achieve surplus levels meaningless.

9.08pm BST

A spokesman for the German government has said he could not confirm or deny Si1/4ddeutsche's claim that eurozone governments are considering pushing Greece to implement capital controls, if there's no deal by the weekend.

8.29pm BST

A Greek official has apparently denied that it could be bounced into implementing capital controls this weekend.

Traders chasing this headline now // GREEK GOVT OFFICIAL DENIES GERMAN REPORT ON PLAN FOR GREECE TO IMPOSE CAPITAL CONTROLS THIS WEEKEND

8.18pm BST

A majority of Greeks blame creditors, not their leaders, for the long deadlock - according to a new poll just released.

#Greece GPO/@AnatropiMegaTV poll: Who bears responsibility for prolonged talks? 56.3% creditors 37.4% the Greek gov't

8.11pm BST

Top officials in Athens have roundly rejected claims made by EU officials that the Greek government agreed to measures which it then rowed back on, triggering the collapse in talks on Sunday.

The version of events leaked by insiders close to EU commissioner, Jean-Claude Juncker, was not only misleading but very "economical with the truth," a government source told the Guardian.

"Yes, reports that we were late by an hour are true but the rest is being very economical with the truth."

7.31pm BST

German newspaper Si1/4ddeutsche Zeitung is reporting tonight that European leaders are drawing up an emergency plan for Greece, including capital controls.

They would be implemented, it claims, if a Greek deal was not agreed by the weekend.

Si1/4ddeutsche reports the #EU has decided on an emergency plan for #Greece: ultimatum, capital contrls & the full monty http://t.co/E9QKdS7V0E

6.03pm BST

Time for another recap of this afternoon's developments.

Brussels insiders have revealed that Greece's latest proposals were rebuffed on Sunday night without even being considered by its creditors, in a sign of how relations have deteriorated.

In the end, by Sunday evening, said Brussels officials, the talks were not only stalemated or at an impasse, but had actually suffered a reversal, with the Greeks trying to re-open issues that both sides had already agreed.

#grexit greece and eu in breakthrough agreement! both sides say that in w/e negotiations in bxl, no negotiations took place

We need a strong, and comprehensive agreement with Greece. And we need it very soon....

While all actors will now need to go the extra mile, the ball lies squarely in the camp of the Greek government to take the necessary steps"

6.00pm BST

Back in Greece tonight, social security minister Dimitris Stratoulis says the cuts being demanded of Greece in pensions amount to a1.8bn -- the equivalent of a 20% drop in earnings for pensioners (our own Helena Smith reports)

"They are also demanding a1.8bn in revenues from increasing VAT. These measures are measures of annihilation and will lead to the enslavement of the Greek people. They are unacceptable and therefore to be rejected."

"There are no high pensions. Pensions have already been cut by 50%, a new reduction would leader to even greater recession."

5.51pm BST

Video: Here's a few highlights from Mario Draghi's appearance at Europe's Economic and Monetary Affairs Committee:

5.48pm BST

Although Mario Draghi made some interesting points to MEPs, he "failed to ignite much hope in the Eurozone this afternoon" about Greece.

So says Connor Campbell, financial analyst at Spreadex.com:

Stating that the region needs a 'strong deal', Draghi failed to clarify how much progress has been made on such a solution, likely because there hasn't been any, whilst also refusing to speculate on the consequences of any potential Greek ECB repayment failures.

The DAX has now effectively lost all of the ground it had made back across last Wednesday and Thursday, and looks like it could return to the 4 month lows it saw last Tuesday, especially with what is looking like it will be another damp squib of a Eurogroup meeting on the 18^th.

5.10pm BST

That photo of the "Come home drachma, all is forgiven" sign has prompted our correspondent, Helena Smith, to send another photo of the same patch of graffiti.

It shows Tom, the resident Irishman of Plaka (the district beneath the ancient Acropolis), who painted the billboards standing with a can of local Greek brew: fix beer.

Tom, who is perhaps the most colourful character in Plaka - where he has lived for decades - believes he has come up with the best solution yet for Greece. "We all need to drink Fix beer to fix it," he tells passersby (of which there are many).

The Irishman regularly paints the billboards that enclose the property on which he lives. The pithy observations accompanying his artwork often snapped by the gang of professional photographers who now roam the streets of Athens.

4.51pm BST

A bad day in Europe's stock markets has ended with the FTSE 100 hitting its lowest level in over three months.

Greek woes push FTSE 100 down 1.1% to 6710, lowest close since 10 March

4.38pm BST

Mario Draghi concludes his appearance at the European Parliament's Economic and Monetary Affairs committee by reiterating that Europe needs a Greek deal very soon.

Both parties are now being called to their capacity to find a compromise that yields...a strong agreement that generates growth with social fairness, with fiscal sustainability and addresses some potential financial stability issues.

We need two elements. One that concerns the substance of the policy agreement, and one that addresses the financing issues.

4.18pm BST

Back to Brussels, where Mario Draghi is being asked whether more gender equality would help the eurozone economy.

All evidence shows that where we have gender equality objectives, productivity is higher, labour participation is higher, aggregate demand is higher.

EU committee on econ affairs grilling of Draghi closes with Q on whether more gender equality would resolve Eurozone woes. Draghi agrees

3.59pm BST

Breaking away from Mario Draghi's testimony (which is being streamed here). Reuters is reporting that Greek savers have taken out around a400m today.

"There is worry but the outflows were rather contained, not as bad as feared in the context of a bad climate after negotiations hit an impasse.

"For the system as a whole, Monday's outflow is estimated at around 400 million euros."

3.47pm BST

Asked about European integration, Draghi says it's more important to expend energy strengthening the eurozone rather than adding more members.

Draghi: Strengthening the monetary union is more urgent than enlarging it

3.44pm BST

Mario Draghi then makes an important point about the Greek crisis -- the International Monetary Fund believes that Greece needs further financing to cover its needs beyond June 30th (when the eurozone bailout expires).

And this view is shared by other institutions, he adds.

Member states must give an answer.....It is not easy, but it is essential.

3.35pm BST

German MEP Jakob von Weizsicker asks Draghi what would happen if Greece fails to meet its repayments to creditors this summer? And what would it take to prompt the ECB to end the emergency liquidity it is providing?

I don't want to speculate about possible missed payments, Draghi replies. We know from the Greek leaders that these comments will be made fully, and in a timely manner.

3.25pm BST

Draghi: Our policy is best contribution we can make to reduction of inequality

3.22pm BST

Another MEP asks why the ECB is driving up asset prices by its QE scheme, thus helping the wealthy, but not doing more to help the poor in Greece.

Whether we like it or not, banks and markets exist and are the only way of transmitting monetary policy, Draghi replies.

3.15pm BST

Another MEP asks Draghi why he won't include Greece in his QE stimulus programme.

Why are you blackmailing Athens, at a time when millions are in poverty and many children cannot even access basic healthcare?

"You're trying to portray the @ECB as a political entity. We're not a political entity," says #Draghi. Hmmm.

3.06pm BST

Dramatic scenes in Brussels!

Greek MEP Notis Marias challenges Draghi about the dire state of the Greek economy, and the unfolding humanitarian crisis. He wants the ECB to do more to help Greece, by assisting with its payments to the IMF.

I don't want to overplay the significance of these numbers, but the responsibility does not lie only with the institutions who have provided this help.

Draghi getting shouted down by Greek MEP. Shakes his head despairingly like a man whose had enough of this

2.53pm BST

MEPs are asking Draghi about how much contagion would be created in the eurozone if Greece doesn't get a deal with its creditors and defaults.

I don't think it's productive to speculate about possible outcomes, Draghi replies.

Draghi: In case of default, "we will enter into uncharttered waters, we have all the tools to manage the situation at best" #Greece

#Draghi: To conclude EMU, we need a quantum leap forward, we need to put our institutional structure on more solid basis

2.48pm BST

The Greek government doesn't agree that the ball is in its court!

Alexis Tsipras's office just released a statement, saying it is waiting to be invited back to the negotiating table:

"We are awaiting the invitation of the institutions and we will respond, at any time, to resume the negotiations."

2.41pm BST

Mario Draghi now turns to Greece, and defends the European Central Bank's handling of the crisis.

We will continue to take our decisions with full independence, he vows.

This rules-based approach is what is required from us. This is what we have been following, and will continue to follow.

We need a strong, and comprehensive agreement with Greece. And we need it very soon.

While all actors must go the extra mile, the ball lies firmly in the camp of the Greek government to take the necessary steps.

2.33pm BST

Mario Draghi turns to the impact ECB's QE programme:

A large-scale asset purchase programme is "not without risks", Draghi says, and we monitor them very closely.

2.28pm BST

2.26pm BST

Draghi tells MEPs that the ECB won't be panicked by the recent volatility in the bond markets.

We must keep a steady monetary course and firmly implement measures, including our asset purchase scheme, Draghi declares firmly, reiterating comments made at the ECB's press conference earlier this month.

2.23pm BST

After apologising for being late (please don't mention it, Mario), Draghi begins giving his statement to the committee:

The latest economic indicators and survey data broadly confirm that the economic recovery is proceeding, at a moderate rate, he says.

2.20pm BST

Mario Draghi will mainly be testifying on his new asset-purchase scheme, the QE programme which was announced in January.

But he will "certainly" give his view on the negotiations between Greece and its creditors, says the committee chairman, Roberto Gualtieri.

2.16pm BST

#Draghi in the @EP_Economics house pic.twitter.com/0dVpN1GN9S

2.15pm BST

Mario Draghi has just arrived at the European Parliament, around 15 minutes late. Perhaps his working lunch with Jean-Claude Juncker overran.....

The first link I provided may require a plug-in; if so, you could try watching on EbS instead

2.11pm BST

The FT has also published details of Greece's latest proposals (which, as you now know, was swiftly rebuffed before actually reaching the Troika).

They confirm that Athens did accept the creditors demand of a 1% budget surplus this year, but its method of getting there was inadequate (as explained at 12.41pm)

Our friends & rivals at @kathimerini_gr got it 1st, but we also got our hands on #Greece's weekend counterproposal: http://t.co/DZCVJWLwr3

2.02pm BST

European Central Bank president Mario Draghi is about to testify before the European Parliament's Economic and Monetary Affairs committee.

It is being streamed live here.

1.58pm BST

Over in Athens the political opposition has accused prime minister Alexis Tsipras' leftist-led government of attempting to take debt-stricken Greece back to the drachma.

"If the government chooses rupture [from Europe] it means a return to the drachma in conditions of absolute chaos with a loss of income of around 30 % and more impoverishment of the Greek people."

"Finally we have arrived at the moment of clarity, yesterday Greece said enough is enough, now the Europeans have to take decisions."

"If there was no discussion of debt relief and only the fiscal [reforms] that they want, [we] can't move forward. Finally, we have arrived at the moment of clarity where the opposite side, and specifically, the German chancellor, has to take decisions."

"Mr Varoufakis is clearly picturesque and dangerous. Unfortunately, Mr Tsipras didn't have the " courage to sideline him."

1.38pm BST

EU officials have signalled their utter disenchantment with the Greek negotiations, by supplying unusual detail on how a weekend of talks in Brussels actually amounted to no negotiations at all.

1.28pm BST

Time for a recap, as we await Mario Draghi's appearance at the European Parliament this afternoon.

The Greek government has only one plan and that is to reach a deal.....

We will not adopt measures which will cut pensions, raise the value added tax on basic goods or measures which exacerbate the vicious circle of austerity.

"The proposals meet the needs of the Greek people, the Greek government, but also of the other 18 (euro zone) member states.....

"The targets have already been significantly lowered... It's not a one-way street."

"We should work out an emergency plan because Greece would fall into a state of emergency," said Oettinger, the EU Commissioner for Digital Economy and Society who is also a senior member of Merkel's CDU in unusually strong comments.

"Energy supplies, pay for police officials, medical supplies, and pharmaceutical products and much more" needed to be ensured, he said.

If anyone thought @atsipras would back down, think again: day after talks break down, he comes out swinging pic.twitter.com/PwlOL6v2dx

"This message is for Greece," Hollande told reporters at the Paris Air Show.

"It should not wait and should restart discussions with the institutions... Let's not waste time."

1.03pm BST

I'd recommend getting your lunch breaks in soon, gang

One hour to go until Draghi takes the stage in Brussels at EP. Interesting to see to what extent Greece is mentioned in opening remarks.

1.01pm BST

Despite the deterioration in relations between the two sides, some analysts believe a deal will be reached in time.

One is Salman Ahmed of Lombard Odier, the Swiss private bank, who reckons Greece's lenders can force Alexis Tsipras's government to make new concessions.

"The Greek banking sector is now totally dependent on the ELA provided by the ECB, which gives the European authorities a very strong bargaining chip as any reduction of this support will very quickly push Greece towards capital controls and extended bank holidays, which in turn will make the ruling Greek government very unpopular.

"We expect noise on the Greek front to continue over the short-term (or even escalate), but expect a deal of some form to happen before the end of the month, given how damaging the alternative is for both sides."

12.41pm BST

Greek newspaper Kathimerini has now published Greece's latest offer to its lenders, which was rejected last night.

And it shows that Greece proposed imposing a special windfall tax on corporate profits over a1m, and also hiking corporate income tax from 26% to 29%, to claw in additional revenue.

#Greek media has revealed "shock" list of tax hikes & other measures proposed by gov to creditors http://t.co/tn3BvZE4JV (in Greek)

11.53am BST

Over in Athens there's been fighting talk this morning from the man who leads the government's junior partner, the stridently anti-austerian right wing populist Independent Greeks party.

"The position of Greece and the Greek government is clear. For so many years Greeks have been forced to endure misery because of the failed policies that lenders imposed.

These policies aren't going to continue, we are not going to surrender democracy, nor our parents, the Greek men and women pensioners who are now living under the poverty line. We have made a huge effort to find a solution. It is now up to them."

11.43am BST

Jean-Claude Juncker has invited Mario Draghi to a working lunch today, before Draghi's appearance at the European Parliament this afternoon.

They plan to discuss the Four President's report on strengthening the eurozone, rather than the Greek crisis, the Commission says.

COM spokesperson Schinas: Juncker will have working lunch with #Draghi today but on four presidents report, not #Greece

11.36am BST

Is there time to conclude the Greek programme by the end of June if eurozone ministers don't reach an agreement at their eurogroup meeting on Thursday?

The only deadline is the 30 June when the Greek bailout programme expires, Schinas replies. Thursday's Eurogroup meeting would have been a good opportunity to assess any progress made over the weekend.

11.32am BST

Earlier today, EU Commissioner Guenther Oettinger warned that Greece will face a "state of emergency" unless it has a bailout deal by the end of June.

What plans is the EC taking to handle this?

11.30am BST

Over in Brussels, the European Commission is holding its own press briefing and defending its position.

Spokeswoman Annika Briedthardt is explaining that the Institutions have already significantly lowered their budget targets in recent months, down from a surplus of 3.5% of GDP to 1%.

We want the numbers to add up....

EU Commission: "Gross misrepresentation to say creditors want cuts to individual pensions"

At midday presser, @MargSchinas says @EU_Commission's doors "open 24/7" if #Greece comes back w/another proposal.

11.22am BST

Some more highlights from Greek government spokesman Gabriel Sakellaridis's briefing:

#Greece govt spox Sakellaridis: "WE BELIEVE THERE WILL BE AN AGREEMENT & WON'T BE ANY PROBLEM WITH REPAYING THE IMF AT THE END OF JUNE."

#Greece govt spox Sakellaridis then says that the GR people's collectedness is the best weapon against any kind of blackmailing.

GR people are cool Sakellaridis: "I want to express the gratitude of the GR govt to the GR people for its amazing coolness it exemplifies

11.09am BST

The Greek government press briefing is being broadcast live here (no English translation, though).

11.06am BST

Gabriel Sakellaridis also blamed Greece's creditors for the collapse in talks last night, saying they didn't actually have a mandate to negotiate with them.

That echoes what the top negotiator, Euclid Tsakalotos, told my colleague Helena Smith last night.

#Greece spokesman repeats what chief negotiator @euclidtsakalotos told me tt EU officials had "no mandate" 2 negotiate hence breakdown

11.01am BST

Greece's main government spokesman, Gabriel Sakellaridis, is fielding questions in Athens now.

Sakellaridis is insisting that Greece will keep working towards a deal, but on its terms rather than accepting the pension cuts, VAT rises and tougher budget surplus targets its lenders demand (reminder, there is a a2bn gap between the two sides).

Gov spo @gabriel_athens "We are not at an impasse" #Greece pic.twitter.com/3RYiDs6Raa

10.50am BST

The president of Portugal, Anibal Cavaco Silva, has also urged Greece and her creditors to resume talks quickly, echoing Francois Hollande's concern.

But he is also unwilling to see Greece cut much slack.

10.37am BST

Germany isn't buckling this morning -- the Berlin government says they want Greece to stay in the single currency, but Athens must offer new proposals first.

10.34am BST

French president Francois Hollande warned reporters at the Paris Air Show that Europe will suffer turbulence unless Greece and her creditors reach a deal.

"We are arriving at a time that could be turbulent if we don't reach an agreement....

Let us not waste time and let's restart the negotiations as soon as possible."

10.06am BST

Newsflash from Greece: The government's top ministers have begun holding an emergency meeting (earlier than we thought....)

Extraordinary meeting between #Greece PM #Tsipras, Dep PM Dragasakis, FinMin #Varoufakis & Interior Min Voutsis underway (via @MegaGegonota)

10.01am BST

#Hollande says Greece shouldn't wait, the government should go back to talks with the European institutions

10.00am BST

France's president, Francois Hollande, has urged Greece and its institutions to resume talks as soon as possible.

* French president francois Hollande says must not waste time on Greece, need to restart talks as quickly as possible - RTRS

9.58am BST

Greek banks appear to be working normally today:

9.55am BST

I know you're all heard this before, but it really is a crunch week for Greece.

Its existing bailout programme expires on 30 June; if there's not a deal by then, Greece will lose a7.2bn of outstanding loans which have been frozen for months.

The deadline is approaching fast (end of June) and the Eurogroup meeting on Thursday is broadly seen as the last chance for Greece to reach an agreement that will unlock the remaining a7.2bn bailout fund. In spite of last week's highly uncertain environment, markets remained relatively stable with most market participants consolidating their positions.

However, we expect markets will feel the heat this week as the odds of a Greek default have increased considerably.

9.19am BST

Jens Weidmann, the head of Germany's Bundesbank, has just warned that time is running out for Greece, Reuters reports.

Weidmann was giving a speech in Frankfurt this morning, and warning that central bank policy can't do everything.

9.05am BST

Greek media are reporting that Alexis Tsipras will meet his bailout negotiating team this afternoon, around noon BST.

Emergency Governmental Meeting to take place under Tsipras at 14:00 (local time), various local media report. #Greece

8.59am BST

The selloff in Greek government debt is intensifying too:

#Greece's 2yr yields jump to 28.3% as default risks rise after debt talks collapsed. pic.twitter.com/EXCdYd8WM1

8.55am BST

The Athens stock market has now hit its lowest point since late April, as bank shares drag it down:

8.43am BST

The Greek stock market has tanked by over 6% in a panicky rush of sell orders, as trading begins in Athens.

Banking shares have slumped by over 12%, hit by fears that the Greek government could default.

Unsurprisingly, the Athens Stock Exchange is down 6.71%. #Greece

8.38am BST

Alexis Tsipras is implacable that Athens will not cave in to creditors' demands.

"One can only see a political purposefulness in the insistence of creditors on new cuts in pensions after five years of looting under the bailouts."

"We will await patiently until the institutions accede to realism,. We do not have the right to bury European democracy at the place where it was born."

#BREAKING Athens ready to 'wait patiently' until creditors become 'realistic': Tsipras

8.23am BST

The unfolding Greek crisis has sent shares sliding in London, Paris, Amsterdam, Milan, Madrid and Frankfurt:

The tone of the reports over the weekend suggested that the other European leaders are losing patience with Greece and news that the implications of a default are under serious discussion does not suggest hopes for a compromise are high.

8.13am BST

European markets are falling in early trading as fears that Greece could soon default on its loans sweep the trading floors.

As feared, the German DAX fell 1.3% at the start of trading in Frankfurt, followed by France's CAC (down 1.1%).

8.04am BST

The parliamentary leader of Chancellor Angela Merkel's conservative Christian Democrats (CDU) has urged Greece to "get back to reality" this morning, showing that tensions in Berlin are rattling up.

Volker Kauder also warned that the Bundestag will refuse to back a Greek aid package unless the IMF is fully involved:

"I couldn't vote for a further payment if the IMF says it won't work...We're pleased that the IMF is with us but if it says it won't work then our parliamentary group will also say we can't pay out further (loan) tranches."

"We all know what's at stake. No one else in Europe is carrying the responsibility for this except Greece itself.

"Not only Angela Merkel (wants to keep Greece in the euro), a lot of people want that....We're saying Greece should remain. But it won't work that Greece sets the terms and says 'everyone else has to dance to our tune'. Greece needs to get back to reality."

8.01am BST

And here's another sign of alarm:

7.53am BST

Money is flowing into German bonds and out of Italian, Spanish and (of course) Greek debt this morning.

That has pushed the yield (or interest rate) on German 10-year bunds down to 0.8%, from 0.85% on Friday night.

Flight to safety after Greek talks collapsed: 10yr Bunds Yield 0.80%; Down 5bps. pic.twitter.com/Psv3HmBRKg

7.43am BST

Stock market traders in Frankfurt may be reaching for the tin hats.

The German DAX is tipped to fall by around 150 points, or 1.3%, when trading begins in around 20 minutes time. Other markets are also expected to lose more ground, extending last week's losses:

The Greek negotiating team are still optimistically pushing for continued inclusion in the Monetary Union, while at the same time pushing for debt forgiveness and maintaining government. This is simply not going to happen but it is important to note that both the Greeks and the Creditor nations have common ground, in so much that they are both agreeing on a 3.5% primary surplus by 2018.

It's the pace and how they get there in the years leading into this that are a major point of contention.

7.36am BST

Good morning, and welcome to our rolling coverage of the Greek bailout negotiations and other key events across the world economy, the financial market and business.

Fears of a Greek default are rising this morning after last-ditch talks between Athens and its creditors collapsed on Sunday night.

"We made huge efforts to meet them halfway but they insisted on both pension cuts and the increase in VAT on restaurants and would not accept closing the gap even partially via administrative measures to reduce tax evasion, even though this was a central plank of our electoral programme.

Moreover, they told us bluntly they had no mandate to discuss a compromise! So much for negotiating...

Happy (early) Monday. Not much constructive commentary being distributed about state of Greek debt negotiations from either side. $EURUSD

Greek talks break down, deadline approaching. Anyone else got a sense of di(C)ji vu?

On the one hand, the Greek government has to offer truly credible measures to reach the lower target budget surplus, and it has to show its commitment to the more limited set of reforms. We believe that even the lower new target cannot be credibly achieved without a comprehensive reform of the VAT - involving a widening of its base - and a further adjustment of pensions. Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners. We are open to alternative ways for designing both the VAT and the pension reforms, but these alternatives have to add up and deliver the required fiscal adjustment.

On the other hand, the European creditors would have to agree to significant additional financing, and to debt relief sufficient to maintain debt sustainability. We believe that, under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates. Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.

The radical wing of Greece's Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system.

Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma.

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