The European Union’s chairman joined growing international calls for Greece to be granted debt restructuring as part of any new loan deal if it delivers convincing reforms to avert imminent bankruptcy.
The call was an implicit challenge to Germany, Athens’ biggest creditor, which has so far ruled out any write-offs as illegal and taken a restrictive view of reprofiling the debt to help Greece over a major repayment hump this year.
Greek Prime Minister Alexis Tsipras was finalizing a tough package of tax hikes and pension reforms to send to eurozone authorities by midnight in a race to secure agreement at the weekend on a third financial rescue for his country.
European Council President Donald Tusk, who is to chair a special euro group summit on Sunday that will decide Greece’s fate, hoped the plans would be concrete and realistic.
"The realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors. Only then will we have a win-win situation," he said.
"Otherwise, we will continue the lethargic dance we have been dancing for the past five months."
Failure to reach a deal on Sunday, including releasing some money to enable Athens to cover debt service over the next few weeks could lead to a collapse of Greek banks next week, sending the economy into freefall and possibly catapulting the country out of the eurozone.
If there is no agreement, all 28 European Union leaders will discuss measures to limit the damage from a Greek collapse, including humanitarian aid, possible border controls and steps to mitigate the impact on neighbours, EU officials said.
German Chancellor Angela Merkel said a classic "haircut" – a write-off of principal – was out of the question. She did not rule out other forms of debt relief such as extending loan maturities, lower interest rates or a longer moratorium on debt service payments.
International Monetary Fund chief Christine Lagarde and US Treasury Secretary Jack Lew both said on Wednesday that debt restructuring must be part of a viable solution to keep Greece in the eurozone.
Lagarde said any programme would have to walk on two legs.
"One leg is about significant reforms and fiscal consolidation … And the other leg is debt restructuring, which we believe is needed in the particular case of Greece for it to have debt sustainability."
Just how uncertain the coming days are was highlighted when European Central Bank President Mario Draghi voiced highly unusual doubts about the chances of rescuing Greece.
Italian daily Il Sole 24 Ore quoted the ECB chief, under growing fire in Germany for keeping Greek banks afloat, as saying he was not sure a solution would be found for Greece and he did not believe Russia would come to Athens’ rescue.
Asked if a deal to save Greece could be wrapped up, Draghi said: "I don’t know, this time it’s really difficult."
The ECB is keeping shuttered Greek banks afloat with emergency liquidity capped until the weekend.
Even France, Greece’s strongest supporter in the eurozone, acknowledged it was working on scenarios for a Greek exit from the currency area if weekend efforts to clinch a deal fail.
Under the agreed timetable, the leftist Greek government, which formally applied on Wednesday for a three-year loan from the European Stability Mechanism bailout fund, has until midnight to present convincing, detailed reform proposals.
Having won a thumping referendum majority to reject the austerity terms of a previous bailout plan, fired his turbulent finance minister and secured support from opposition party leaders, Tsipras is in a stronger position to impose tough measures and face down resistance at home.
But in a sign of the some of the challenges he will face, the leader of the far-left wing of his SYRIZA party came out to denounce any imposition of harsh measures on Greeks.
"We don’t want add to the past two failed bailouts a third bailout of tough austerity which will not give any prospects for the country," Energy Minister Panagiotis Lafazanis said.
According to Athens daily Kathimerini, Greece is planning a reform package worth 12 billion euros over two years, more than previously planned to offset a return to recession after months of difficult negotiations with creditors.
A government official disputed the figure, saying the package was still a work in progress.
Instead of growing by 0.5 percent this year, months of uncertainty and almost two weeks of capital controls mean "there are estimates of a recession of about 3 percent", Kathimerini said. Greece emerged only last year from a deep recession that shrank its economy by a quarter over six years.
A second newspaper, Naftemporiki, detailed what it said were proposed tax hikes to raise the money – an increase in corporate tax to 28 percent from 26 percent and in value added tax on luxury goods from to 13 from 10 percent; on processed foods, restaurants, transport and some private health services to 23 from 13 percent and on hotels to 13 percent from 6.5 percent.
The report said Greek islands would continue to enjoy tax breaks that creditors had sought to scrap. Naftemporiki said the entire package would be worth 10 to 12 billion euros.
Such measures may face resistance from the hard-left wing of Tsipras’ SYRIZA party and from his junior coalition partner, the Independent Greeks.
Draghi under fire
Draghi’s support for Greek banks came under attack from German Bundesbank chief Jens Weidmann, who said it was up to governments, not the central bank, to provide any aid to Athens.
"Central banks need to show where their limits lie," he told an audience in Frankfurt. "It needs to be crystal clear that responsibility for further developments in Greece … lies with the Greek government and the countries providing assistance – not the ECB Governing Council."
Weidmann also said capital controls should remain in force in Greece until there was any deal, and that the ECB should not increase its liquidity assistance for Greek banks, without which they may collapse next week.
European officials told Reuters on Wednesday that some large Greek banks may have to be shut and taken over by stronger rivals as part of a restructuring of the sector that would follow any bailout of the country.
One official said Greece’s four big banks – National Bank of Greece, Eurobank, Piraeus and Alpha Bank – could be reduced to just two, a measure that would doubtless encounter fierce resistance in Athens.