Germany rejects Greece request for loan extension

REUTERS/Yannis Behrakis

Last Updated Feb 19, 2015 9:49 AM EST

ATHENS, Greece - Greece sent its European creditors a proposal on Thursday in a last-moment bid to unfreeze talks on its bailout program and end uncertainty over its future in the euro. Hopes of a deal, however, were quickly dampened by Germany, the main creditor.

The government in Athens offered to extend its rescue loan agreement by six months, as the eurozone had demanded in order to give all sides more time to hash out a more permanent deal. It held back on offering to continue in full a series of budget cuts and reforms that the eurozone has required since 2010 in exchange for loans, but that Greece blames for devastating its economy.

Eurozone finance ministers will meet in Brussels on Friday to try to reach an agreement, but Germany's initial reaction suggested the sides were still far apart.

German Finance Ministry spokesman Martin Jaeger said in a statement that the letter from the new Greek government "is not a substantial proposal for a solution." He said it amounts to a request "for bridge financing without fulfilling the demands of the [bailout] program," namely the budget measures.

Greek shares were up 1 percent in midday trading, and the Euro Stoxx 50 index gained 0.2 percent.

Thursday's request was made "to provide a protection umbrella for [Greece's] banking system," a government official in Athens said.

Speaking on customary condition of anonymity, he said the extension would concern the loan agreement that has kept Greece from bankruptcy for five years, and whose main component expires in nine days. The extension would give both sides time to agree on a longer-lasting aid program that would keep Greece solvent but also lighten the terms of repaying its 240 billion euros in bailout loans.

Greece's plan on Thursday included a proposal for a new five-year agreement with European partners that would include easing the country's huge debt load. The Greek official said that Athens' proposed measures to accompany the loan extension would seek to focus more on encouraging economic growth and less on reducing debt, which has been the eurozone's priority for years.

The government "also will undertake immediate reforms against tax evasion and corruption, while there will be immediate measures to address the humanitarian crisis and restart the economy," he said.

In a possible concession to the eurozone, the official implied that the government is abandoning its pre-election talk of seeking forgiveness for most of the country's 320 billion-euro debt load, the bulk of which is made up of rescue loans from other eurozone countries. He indicated that the new deal Athens wants for 2015-19 would look for longer repayment dates and lower interest rates, something the eurozone has said in the past it was willing to offer.

Analyst Evangelos Sioutis, head of equities at Guardian Trust Securities, said a rift with Greece's creditors would be in nobody's interest, but warned a deal is needed fast.

"If there's no agreement in the next few days there is a risk of [a bank run] because liquidity in Greek banks is very limited and there are many who say that capital controls are very close," he said. "There must be an agreement in the next few days."

The European part of Greece's bailout expires on Feb. 28. If no deal is reached by then, the European Central Bank would face increased pressure from eurozone governments to cut off emergency financing for Greek banks.

That could place so huge a strain on the country's financial system that the government might be forced to print its own currency and leave the euro. European countries could be stuck with losses on their loans to Greece, which would suffer terribly, at least in the short term.

A new Greek currency would immediately drop in value, pushing up the cost of fuel and key consumer goods, most of which are imported. That would take a terrible toll on a society where poverty levels have surged, the average income has fallen by at least a third and one in five workers are unemployed, mostly long-term.

Dimos Tzamaloukas, an Athenian in his fifties, said that despite the pressure most Greeks were not overtly worried, due to their already difficult situation. "Perhaps those who have a lot of money are worried," he said. "The rest of the people, 80 percent, are on the verge of poverty."