Germany and Greece are about to go head to head again

Greek German flagsREUTERS/Thomas PeterGreek and German flags.

The eurozone’s finance ministers are heading into another face-to-face negotiation Friday, after Greece blinked in Europe’s massive game of chicken on Thursday.

Here’s what happened yesterday and what it’s likely to mean for today:

  • Greece submitted a request for an extension of its existing bailout, a pretty significant capitulation on the part of the radical new government.
  • The German finance ministry said Greece’s proposal couldn’t be accepted because it was “not substantive”.
  • A member of Germany’s team on the Eurogroup working group (which actually does a large amount of the negotiating) called the Greek proposal a “Trojan horse“.
  • But earlier comments from Italian finance minister Pier Carlo Padoan and later ones from French PM Manuel Valls were much more conciliatory, suggesting Europe’s other large economies aren’t on board with Germany’s hardline stance.
  • Showing his customary diplomacy, Greek finance minister Yanis Varoufakis tweeted out a piece last night titled “Greece Should Not Give In To Germany’s Bullying“.

The Eurogroup meeting begins at 3 p.m. Brussels time today (so 2 p.m. GMT, 9 a.m. ET). Assuming it doesn’t once again fall apart early, it’s likely to be a long, long night.

The Greek government is unlikely to want another round of headlines suggesting it has given in even further. Other than a few cosmetic changes, this may be as far as Athens moves: It has already effectively accepted the existing bailout agreement, something it railed against in the recent election campaign.

On the other hand, the German government has bought itself some goodwill. Bild, Germany’s most popular tabloid newspaper by far (with about 2.5 million in circulation) has been particularly glowing about Germany’s stance:

That’s thanking Wolfgang Schaeuble (Germany’s finance minister) for “finally saying no to the bust Greeks”.

It’s hard to say how this plays out: Germany may be less combative now that the government has had some positive media attention and showed itself to be opposed to any changes (Greece has already capitulated on quite a lot of what it wanted), or this congratulatory attitude may make a deal more unlikely.

Bank of America Merrill Lynch economists say time is running out. If there’s no deal today, or by the end of next week, major financial risks will begin to emerge.

Although data on bank deposits are only available with a one-month lag, the increase in the ELA limit, as well as press reports, suggest risks of a bank run if the Eurogroup does not agree on a framework/backstop by the end of next week. That Athens and Eurogroup reaches such an agreement is our baseline, but risks remain.

The analysts at BAML also reckon that what’s currently on the table will not be enough – Athens will need to offer more promises to get a deal, which the battered government may not be able to do:

Although the government’s request is an important step, we believe that the Eurogroup will ask for some revisions. Athens had initially been against asking for such an extension, as breaking clear from the current program was a key element of their election manifesto. Therefore, its request should be seen as a significant effort to compromise, in our view. However, the Eurogroup may ask for more specifics on future reforms and targets.

Keep an eye out for lines breaking through the day, even before the meeting begins.

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