Merkel considers Greek options as Tsipras wins aid for banks

German Chancellor Angela Merkel met with Greek and French leaders as her government considers throwing a lifeline to Greece, as both sides firm up their negotiating positions for a deal to unlock aid.

With Greece’s banking system on the brink and Prime Minister Alexis Tsipras running out of time, Merkel’s government may be prepared to endorse a rescue payment in return for just one reform from the creditors’ list of demands as a start, two people familiar with Germany’s position said. Merkel, Tsipras and French President Francois Hollande held two hours of talks ending early Thursday.

A government spokesman denied that Germany is considering such a deal, saying that it will only accept proposals made by the European Commission, the International Monetary Fund and the European Central Bank, the three institutions that represent the creditors. Germany said Greece agreed to “higher intensity” talks at the Brussels meeting, which didn’t yield a breakthrough.

Less than three weeks before Greece’s aid program is set to expire, both sides will have to move if they are to seal an accord.

“Where there’s a will, there’s a way,” Merkel told reporters as she arrived in Brussels earlier for a European Union-Latin America summit. “The goal is to keep Greece in the euro area.”

Standard and Poor’s cut Greece’s credit rating to CCC from CCC+, citing a delayed payment to the IMF that indicates the government’s priority to pay pensions and domestic spending over servicing debt payments, according to a report Wednesday.

‘Likely Default’

“In the absence of an agreement with its official creditors, Greece will likely default on its commercial debt within the next 12 months,” analysts led by Frank Gill wrote in the report. “Without a turnaround in the trajectory of nominal GDP and deep public-sector reform, Greece’s debt is unsustainable.”

Greece wants a nine-month extension to the bailout agreement that is due to expire at the end of the month to allow more time to work out its reform program, an official from the administration in Athens said Wednesday. It’s difficult for Tsipras to concede more ground to the country’s creditors, the official added.

The European Central Bank already handed Greece one concession, authorizing the biggest increase in emergency funding for the country’s banking system in almost four months during a teleconference on Wednesday.

Cash Reserves

The Governing Council increased the limit on Emergency Liquidity Assistance by 2.3 billion euros ($2.6 billion) to 83 billion euros to replace deposit outflows. Before the ECB intervened, banks’ cash reserves were down to about 700 million euros, a person familiar with the data said.

ELA “has to be weighed against the risk of overturning the entire Greek financial system,” ECB Executive Board member Yves Mersch said in Frankfurt on Monday. “The risk of saying no would be to plunge a whole financial system into chaos.”

Governors kept the discounts on the securities pledged as collateral against ELA unchanged despite the deterioration in Greece’s financial situation since that policy was last changed late last year.

The benchmark Athens Stock Exchange fell 1.1 percent Wednesday adding to a 26.5 percent drop since December, according to data compiled by Bloomberg. The yield on Greece’s 1.7 billion euros of 3 percent bonds due 2025 rose to 11.4 percent, which is up from a 7.4 percent in December.

Higher Taxes

While the Germans still insist Greece will eventually have to deliver a package of steps that includes higher taxes, state asset sales and less generous retirement benefits, they may settle for a clear commitment to the institutions by the Greek government to just one measure up front to unlock aid, said the people, who asked not to be identified discussing the government’s negotiating stance.

Merkel says Greece must honor an accord struck with its euro-area partners in February that gave Tsipras an extra four months to carry out economic reforms before receiving its final aid installment of 7.2 billion euros. The chancellor hasn’t spelled out details of a possible deal in public and said that whatever measures Tsipras undertakes, they have to “add up” to make Greece’s debt load sustainable.

Major Overhaul

While Tsipras could be given until next year to carry out changes, such as trimming retirement benefits, he would have to initiate at least one major overhaul if he wants to get aid flowing, the people said. Neither person specified which demand Greece should fulfill.

To convince creditors that Greece is serious, Tsipras would have to take tangible action, for instance introducing reform legislation in the Greek parliament, one person said. If Greek officials move quickly, funds could be released in early July, the person said.

Germany also wouldn’t object to extending the aid program again if Tsipras presents specific policies to meet the goals of the memorandum of understanding agreed with Greece’s euro-area partners on Feb. 20, the people said. They didn’t say how long such an extension might run.