Greece says a deal is close -- but Germany says nein

After Prime Minister Alexis Tsipras met German Chancellor Angela Merkel in Riga during a European summit on Thursday night, Athens believes a deal is close — but not everyone agrees.

The last few days have seen a flurry of Greek government spokespeople rushing to say that the bailout agreement was in its final stages would soon be finished — following Yanis Varoufakis’ suggestion that Athens would have a deal within a week.

German finance minister Wolfgang Schaeuble poured cold water over the comments on Thursday, telling Reuters that all of the optimism was coming from the Greek side of the talks — adding that “there is not yet any substance to the mere announcement that we are closer to an agreement. This is still within the realms of atmosphere.”

Schaeuble is often seen as the attack dog of the Eurogroup, willing to push a harder line than perhaps will eventually be the case. But this morning similar comments came from a more senior (and reserved) source.

German Chancellor Angela Merkel said there was “intensive work” still to be done between Greece and its creditors (the European Commission, International Monetary Fund and European Central Bank).

That echoes the line that EU Commission Vice President Valdis Dombrovskis gave Bloomberg Friday morning, saying “progress was not as fast as it should have been,” and that the country must present a more comprehensive reform package.

In a note yesterday Bank of America analysts indicated some of the political difficulties in getting a deal done, with the government in Athens having to consider its own internal politics:

We believe that internal opposition to a compromise is the key reason for the inability to have a deal on the review so far. The Greek government has been trying to reach an agreement that the Greek parliament will be able to approve without the help of opposition parliamentarians, as the latter could put the current government at risk. This has proved to be impossible so far. Even if the so-called left platform in Syriza, which includes 30 of the 149 Syriza parliamentarians, change their strong views and vote for a program, we are concerned about other Syriza parliamentarians, who are not necessarily constrained by party discipline — Syriza used to be a coalition of parties until recently.

Unless the government’s parliamentarians make a U-turn, we see substantial risks in the weeks ahead. We do not expect a U-turn from the Eurogroup and the IMF to accept the Greek government’s red lines, although they could show some flexibility. Negative scenarios include a collapse of program negotiations, a failed parliamentary vote on a deal, a referendum on a deal, or a collapse of the Greek government and substantial uncertainty until the formation of a new government.

Greece got some backup from other European sources on Friday — Italian finance minister Pier Carlo Padoan said in La Repubblica that the eurozone would be more fragile without Greece. EU Commission chief Jean-Claude Juncker also said a Greek exit is not on the table.

But there’s not much time left for this circle to be squared. Greece has another payment to make to the IMF on June 5th that the government has effectively admitted it can’t make — to make the last payment, it had to dig into an IMF reserve fund.

Last week, the IMF’s main stumbling blocks were listed as labour market reforms and the Greek pension system — there’s been very little since then to suggest any significant progress on these fronts, or that the IMF is any less serious about demanding them.

The payments coming in the two weeks after June 5 are twice as large as the last one Athens has made and it seems extremely unlikely that the government can manage them without help — failure to do so would mean default. Most analysts do believe that a deal will be reached, but it’s getting increasingly tense as June approaches.

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