GREECE

The inside story of the tortuous negotiations over ’ debt How went bust BY RENEE MALTEZOU, ELIZABETH PINEAU AND ANDREAS RINKE

SPECIAL REPORT 1 GREECE THE DEBT TALKS

ATHENS, JULY 1, 2015

t was a small room with a plain wooden table a few feet wide. The Greek Prime IMinister sat on one side, along with a translator and Angela Merkel, the German chancellor. On the other sat President Francois Hollande of ; around were a handful of officials. In this modest Brussels setting last Friday morning, key players in the great Greek debt drama tried to avert a melt- down that could threaten the future of the euro and even the (EU). Merkel and Hollande made a final offer of billions of euros in aid for bankrupt Greece – if Tsipras would sign up to economic re- forms demanded by his country’s creditors. HELPING HAND: Greek Prime Minister Alexis Tsipras is welcomed by President The participants looked tired, their body Jean-Claude Juncker ahead of a euro zone summit on Greece in Brussels on June 22. Cover, the language was stiff. The meeting did not last flags of Greece and the European Union flutter under storm clouds in Athens in May./YVES long. Tsipras, according to Greek officials HERMAN, ALKIS KONSTANTINIDIS close to the negotiations, had already de- cided to call an emergency meeting of his cabinet in Athens for that evening. Even The whole planet would Tsipras’ call for a referendum infuriated as he spoke with Merkel and Hollande, he take a Greek ‘No’ ... to mean finance ministers from the euro zone, whose was preparing to hand the decision over Greece wants to set itself apart meetings are known as the Eurogroup. Greece’s fate to the nation’s voters. The from the euro zone. They and the International Monetary Fund day before he had decided, after months of (IMF) had previously rescued Greece from talks, that he and Greece’s creditors were Jean-Claude Juncker its mountainous debts with massive bailout unable to agree a deal. President of the European Commission, urging programmes; the latest was due to end on As he flew home to Athens later that day Greeks to vote in favour of a debt June 30, when Greece also had to pay 1.6 on a government plane, the young Greek deal in a July 5 referendum billion euros to the IMF. leader settled on the idea of a referendum, Patience exhausted, the Eurogroup de- according to the Greek officials. Staging a serial brinkmanship. As this account cided last weekend to let the bailout pro- full-scale election would take too long, he details, all parties had their flaws and gramme expire as scheduled. The European had been advised. But a referendum could misjudgments. Central Bank (ECB), which was keeping express the will of the Greek people. At stake is far more than money. The Greek banks afloat with 89 billion euros of He informed ministers of his plan, the Greek problem cuts to the heart of Europe’s emergency funding, also decided enough cabinet approved it and he announced future. In Tsipras’ eyes it is a crisis of de- was enough: it said it would give no further the referendum in a late night television mocracy and sovereignty, of whether the emergency funding. broadcast. The abruptness of the move took wishes of a nation state outweigh the aims In Greece fearful citizens queued to take some European leaders by surprise. Merkel of the supra-national euro zone and EU. cash out of ATMs. Tsipras and his govern- and Hollande were told of it by telephone For the euro zone – and Germany in ment ordered Greek banks to stay shut and shortly before Tsipras announced it. particular – it is a test of unity, of whether imposed capital controls to stop funds leav- The bombshell said much about the countries within the 19-nation single cur- ing the country. long-running struggle between wayward rency bloc that fail to meet its economic On Tuesday Greece failed to make its Greece and the megalithic European standards and agreed rules can be brought payment to the IMF. Though talks between Union, a struggle beset by blunders and into line, or not. the various parties continue and a deal may

SPECIAL REPORT 2 GREECE THE DEBT TALKS

still be struck, Wednesday dawned with Greece adrift - with no recourse to fur- Greece’s mountain of debt ther funding from the IMF or the bailout Greece Euro zone programme. The referendum is due on July 5, though Gross government debt as percentage of GDP rumours circulated on Wednesday that Includes European Commission forecasts it might be cancelled. If it does go ahead, Greek voters face a stark choice: Give in to 200 their creditors and accept painful economic reforms, or go their own way. The latter course, some European leaders have made clear, will amount to a decision to quit the 150 euro zone – though Tsipras disputes that view. This account, based on interviews with 100 people close to the negotiations, shows how the debt crisis became a political one. None of the main players would speak to Reuters 50 on the record. A CROSSROADS From the moment he became Greek prime 0 minister in January, Tsipras, 40, posed a 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 novel challenge to the well-cut suits of Brussels. Bold and inexperienced, he had Government surplus/deficit as percentage of GDP no fear of defying convention - not for him Includes European Commission forecasts any necktie, no matter who he was meeting. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 His finance minister, , was 0 inclined to leather jackets, blunt language and radical ideas. Though Tsipras’ style was casual, his re- solve was steely. As talks on Greece’s debts 4 dragged on, he held firm to the core de- mands of his leftist Syriza party for debt relief – allowing Greece not to repay some of the billions it had borrowed - and an end 8 to austerity. Tsipras, who had flirted with commu- nism in his youth, cast the debt crisis more as a political issue than a problem of num- 12 ber-crunching. Europe, he wrote in French newspaper Le Monde at the end of May, was “at a crossroads.” Either it showed soli- darity and granted Greece an easier ride, or 16 it would face division and “the beginning of the end for the European unification Sources: Thomson Reuters Datastream; European Commission project.” That was his bargaining chip: If the

SPECIAL REPORT 3 GREECE THE DEBT TALKS

euro zone leaders did not cave in, Greece could cause chaos by defaulting on its loans. Greece’s steep decline Greece owes its official lenders 243 billion GDP per capita since 2005 euros ($271 billion), according to a Reuters Rebased to zero at end-2007 calculation based on official data. Germany Germany alone accounts for 57 billion euros in two 5 4.8% bailout programmes. Germany is also the France biggest shareholder in the European Central 0 -1.2% EURO Bank (ECB), which has provided 118 bil- ZONE lion euros in liquidity to Greek banks, the -2.9% bank’s head Mario Draghi recently said. -5 -6% Tsipras’ chief opponent was Merkel, Ireland long-standing leader of Germany, seen by -6.8% some as a bastion of financial rectitude. -10 Spain Merkel and her combative finance minis- -7.5% ter, Wolfgang Schaeuble, did not believe -15 Italy Germany should pay any more for Greece’s -11.9% economic mistakes. Not all creditors agreed: Some were sympathetic to Tsipras’ -20 call for debt relief. One of Merkel’s main objectives, ac- cording to a senior German official, was to -25 Greece -24.6% get creditors and other institutions to take a united position. Berlin suspected the EU Commission – the executive body running -30 the EU – was willing to give too much 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ground to Greece to hold the euro zone together. Sources: Thomson Reuters Datastream; European Commission The Germans fretted that Jean-Claude Juncker, the Commission’s president, might be too amenable to Tsipras. When Juncker had met the newly-elected Tsipras in director, that it was essential for Germany euro zone, according to a person familiar February, he had greeted him with a kiss that the IMF remain engaged in the Greek with the German position. and led him off by the hand to a meet- bailout programme, according to two per- Whether Tsipras felt emboldened by ing. One senior German official joked: “If sons briefed on their discussion. But the divisions among Greece’s creditors is un- Juncker could decide for himself, we would German chancellor ruled out what many clear. He played his cards close to his chest. have a pure financial transfer (of money economists, and the Greek finance min- Compounding the difficulties on the Greek from Germany and other countries) to ister, saw as the most practical solution side was the fragmented nature of Tsipras’ Greece for the next 10 years.” to Greece’s immediate cash crunch. That ruling party, Syriza, an assemblage of leftist The Germans and their northern credi- idea was to allow the euro zone’s bailout factions, some passionately opposed to any tor allies repeatedly pointed out that the fund, the European Stability Mechanism deal involving austerity. Alexis Mitropoulos, Commission does not provide loans to (ESM), to pay off the loans from the IMF a Syriza member and deputy parliamentary Greece. It is the member states who lend and to take over Greek government bonds speaker, described one set of creditors’ pro- the money and call the shots. held by the ECB. Both sets of debts could posals as “the most vulgar, most murderous, Merkel was also at odds with the IMF, be replaced with lower-rate, longer-term toughest plan.” which thought further debt relief for loans from the ESM. “LOOTING” Greece should be considered. Merkel told Merkel told Lagarde the idea would be Christine Lagarde, the IMF’s managing unacceptable to Berlin and to others in the As endless meetings came and went, both

SPECIAL REPORT 4 GREECE THE DEBT TALKS

POWER PLAYERS: International Monetary Fund Managing Director Christine Lagarde (here at a conference on inequalities in Brussels in June) and German Chancellor Angela Merkel (in Germany’s parliament in March) had different approaches to solving the debt crisis. But they agreed on the central issue that Greece had to reform its economy. REUTERS/ERIC VIDAL, FABRIZIO BENSCH

sides refused to give much ground. Tsipras Yannis Stournaras, summoned senior bank- Pensions gobbled up 17.5 percent ratcheted up the rhetoric, accusing Greece’s ers to a special meeting. According to two of of Greece’s GDP in 2012, according to creditors of “five years of looting under the those present, Stournaras issued a dire warn- Eurostat, more than any other EU country. bailouts.” Greece, he said, would wait un- ing. “If there is no deal, the Europeans will Despite subsequent cuts, the country still til the creditors recognised the will of the have decided to move on – (that) is what we spends 16 percent of its GDP on pensions Greek people to end austerity. “We do not were told,” said one of the bankers. In other – though that’s partly because Greece’s have the right to bury European democracy words, if there was no deal, Greece would GDP has fallen. Creditors say the system at the place where it was born,” he said. default, go bust and maybe crash out of the is fundamentally flawed, creating perverse On the other side, some EU officials euro. A spokesman for the central bank con- incentives for Greeks to retire early, draw wondered whether Tsipras wanted to reach firmed that the meeting took place but de- a pension and then work in the shadow a compromise at all. The Greek govern- clined to comment on what was discussed. economy, depriving the government of ment repeatedly sent its proposals or re- revenue. A “TOMBSTONE” sponses too late to be analysed by experts of The IMF wanted that to change. Tsipras the EU, ECB and IMF before ministerial Faced with time running out and the pos- resisted, saying that high unemployment meetings, raising suspicions that it wanted sibility of banks closing their doors, Tsipras meant that pensions were a vital source of to avoid scrutiny of fiscal measures that did began contemplating concessions to income for many families. not add up. Greece’s creditors, according to aides. One On Sunday June 21 he met Syriza col- The creditors saw chaos looming. They of the main sticking points was the pen- leagues in Athens to thrash out a new deal hurriedly agreed to hold an emergency sions system. The IMF insisted that Greece to present to creditors. “Tsipras was in and summit at which political leaders – not of- overhaul its pension system to reduce the out of the meeting room,” said a deputy ficials – would discuss the crisis. It was a burden on the state, people familiar with minister. “He spoke several times by phone goal Tsipras had been seeking. the negotiations said. to other EU leaders and some policy mak- Events, though, had a momentum of ers during the meeting. That’s why it lasted their own. Fearful Greeks were pulling their We do not have the right to so many hours.” money from Greek banks. Between last bury European democracy at the Late that night Tsipras’ team sent new October and April, about 30 billion euros place where it was born. proposals to euro zone officials in Brussels. had flowed out. Now the pace quickened: But they arrived too late for proper consid- In just a week, depositors yanked some 4 Alexis Tsipras eration at a summit scheduled for the next billion euros out of Greek bank accounts. Greece’s prime minister, criticising the country’s day, according to EU officials. The governor of Greece’s central bank, creditors for overriding the wishes of voters Still, after months of wrangling there

SPECIAL REPORT 5 GREECE THE DEBT TALKS

was mood of optimism as European leaders gathered in Brussels on June 22. President Francois Hollande of France flew in on a Falcon jet and was upbeat, despite head- lines such as “Europe on a knife-edge” and “Greece Bust.” As a person on the plane familiar with the president’s thinking told Reuters: “It’s always at the last moment that people find solutions that seemed dif- ficult to imagine at the start.” The same source added a note of cau- tion. “This drama has a risk too, and that’s that people may find themselves in a real Greek tragedy, with a death at the end. Possibly several.” True to the warning, talks did not go well. Tsipras gave some ground on pension reforms, but he focused on increasing pen- sion contributions and taxes rather than cutting spending. Creditors wanted more PRAYERS: A man prays before lunch in an Athens soup kitchen run by the Greek Orthodox church. cuts. Greece’s economy has declined by 25 percent since 2007, and thousands of Greeks now depend on German finance minister Schaeuble handouts. REUTERS/YANNIS BEHRAKIS remained unconvinced. “There is nothing new beyond many trying to create expec- tations which are not supported by sub- How can you cut a deal that extended beyond July 5. stance,” he told reporters. Once again dis- will increase suicides and make France was willing to discuss the idea, cussions descended into disagreement and people poorer? euro zone officials said. But other finance acrimony. ministers refused. “That (calling a ref- Ordinary Greeks also reacted angrily. Yannis Michelogiannakis erendum) is a sad decision for Greece,” As word of Tsipras’ proposals reached A Syriza lawmaker, commenting on Greek said Jeroen Dijsselbloem, president of the Athens, impoverished pensioners protest- negotiators making concessions to Eurogroup. “It has closed the door on fur- ed in the streets. Leftist lawmaker Yannis creditors’ demands ther talks while the door was still open, in Michelogiannakis decried the proposed re- my mind.” forms as a “tombstone” for Greece, asking: money, though, would simply go to meet Schaeuble was blunter: “The negotia- “How can you cut a deal that will increase Greece’s debt repayments, and none of it tions are clearly ended, if I understand Mr suicides and make people poorer?” was new cash not already committed under Tsipras correctly. We have no grounds for With creditors insisting on tougher the bailout programme. Greeks would still further discussions.” measures, Tsipras began considering put- face years of austerity and economic reform. Early that evening Varoufakis, the Greek ting the issue to voters. “We realised ... that Tsipras spurned the offer and accused finance minister, left the EU Council build- there was no will to reach a deal on a viable the creditors of “blackmail” in a press con- ing in Brussels. According to several par- solution,” said a Greek official. ference with reporters. ticipants in the Eurogroup, he went with a On June 26, Tsipras met Merkel and smile. “It was disturbing that someone who WEIGHTY DECISION Hollande in the small room in the French has just made a decision against his coun- delegation offices in Brussels. Merkel and When he announced the referendum, try, is not devastated, but grins,” said an EU Hollande dangled the prospect of more Tsipras hoped the European institutions official. than 15 billion euros of loans in instalments would grant some respite from financial The following day, Varoufakis posted a over the next five months if Tsipras agreed pressures until the vote could be held. He blog entry defending the referendum. “The to creditors’ proposals. Almost all of that asked for Greece’s bailout programme to be very idea that a government would consult

SPECIAL REPORT 6 GREECE THE DEBT TALKS

MIDDLE WAY: Though some Greeks wanted their government to default, polls showed that most wanted to stay in the euro zone. This protestor joined a June 22 rally in Athens urging the government to sign up to a deal. REUTERS/YANNIS BEHRAKIS

its people on a problematic proposal put made plain the stakes as he sees them in Taylor, Jan Strupczewski, Philip Blenkinsop to it by the institutions was treated with a referendum. On June 29 he told a news and Alastair Macdonald in Brussels; Erik incomprehension and often with disdain conference: “The whole planet would take Kirschbaum, Sabine Siebold and Noah Barkin bordering on contempt,” he wrote. “Can a Greek ‘No’ ... to mean Greece wants to in Berlin; and John O’Donnell in Frankfurt. democracy and a monetary union coexist? set itself apart from the euro zone and from Written by Richard Woods. Edited by Simon Or must one give way?” Europe.” Robinson In Berlin, government officials noted He said he would ask “the Greek people that Schaeuble had suggested the idea of a to vote ‘Yes,’” advising that they should not FOR MORE INFORMATION Greek referendum back in May. “commit suicide.” Paul Taylor, European Affairs Editor Greek officials close to the talks said [email protected] negotiations could continue despite the Maltezou reported from Athens, Pineau from Simon Robinson, Enterprise Editor, expiry of the bailout programme and the Paris and Rinke from Berlin. Europe, Middle East and Africa referendum. For now, though, Greek banks [email protected] remain closed. Efforts to find a compro- Additional reporting by Deepa Babington, Simon Newman, Photo Editor mise continued, though on Wednesday Lefteris Papadimas, George Georgiopoulos, [email protected] Merkel showed little sign of giving ground. Karolina Tagaris and Michele Kambas in Michael Williams, Global Enterprise Editor EU Commission president Juncker has Athens; Ingrid Melander in Paris; Paul [email protected]

© Thomson Reuters 2015. All rights reserved. 47001073 0310. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. ‘Thomson Reuters’ and the Thomson Reuters logo are registered trademarks and trademarks of Thomson reuters and its affiliated companies.

SPECIAL REPORT 7