European hardliners call Greece trust deficit hurdle to deal

European hardliners led by Germany damped expectations that a deal with Greece was at hand, questioning whether the government in Athens can be trusted to keep its word in exchange for a 74 billion-euro ($83 billion) bailout.

The German finance ministry proposed that Greece be suspended from the euro area for five years, according to a report by Frankfurter Allgemeine Sonntagszeitung. The ministry couldn’t be immediately reached for comment.

Greece’s proposal, which was ratified by the nation’s lawmakers early Saturday, fails to reflect the economic deterioration in the country since talks collapsed, banks were shut and capital controls were imposed two weeks ago, according to Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup.

“We’re not going to deal with bills that everybody knows can’t be believed,” Germany’s Wolfgang Schaeuble told reporters as he arrived for the emergency consultations. “We will certainly not be able to rely on promises. The philosophy of all assistance programs was that you had to implement it step-by- step in order to get further assistance — and that won’t be weakened, rather it will be intensified.”

The wall of skepticism came hours after Greek Prime Minister Alexis Tsipras won overwhelming support in Parliament for a package of spending cuts, pension savings and tax increases that would clinch the country’s third bailout since 2010. The finance ministers’ talks will be followed by a summit scheduled for Sunday, the deadline for a new agreement.

Officials from the creditor institutions gave the proposals a cautious welcome, with International Monetary Fund chief Christine Lagarde foreseeing “a lot more progress.”

Showdown Prelude

Greece and its creditors are struggling for common ground after Tsipras missed a payment to the IMF June 30 and allowed its second bailout to lapse the same day.

The five-month standoff between the former communist student leader, whose party translates to Coalition of the Radical Left, and his creditors deepened the country’s economic misery. Banks are running out of cash — even with withdrawals limited to 60 euros a day — pensions have been rationed and commerce is grinding to a halt.

“The Greek economy is moving closer to the abyss,” Slovakia’s Peter Kazimir said.

While Greek government bonds rallied on Friday on optimism Tsipras’s package of spending cuts and tax increases would lead to a deal, debt issued by its four largest banks remained below 40 cents on the euro, according to data complied by Bloomberg.

The prices suggest investors still expect banks to restructure debt after the country’s economic crisis spurred depositors to withdraw about 40 billion euros between December and June.

The European finance chiefs also rebuffed any talk of debt relief, a step that the IMF has backed.

“Debt relief is impossible,” Schaeuble said.

The country’s three creditor institutions — the IMF, the European Commission and the European Central Bank — earlier assessed the program positively as a basis for the bailout, according to a euro-area official who spoke on condition of anonymity.

Accord ‘Possible’

“The institutions have analyzed the Greek proposals and we have jointly decided that they constitute a basis for negotiating a new financial assistance program,” European Union Economic Affairs Commissioner Pierre Moscovici told reporters in Brussels.

Greece’s international creditors still view the country’s reform proposals as insufficient to meet budget surplus targets, Frankfurter Allgemeine Sonntagszeitung said, citing an assessment paper provided to euro-area finance ministers.

In a prelude to the Brussels showdown, Tsipras won a majority of 251 votes in the 300-seat parliament for his bailout proposals, but at a cost. More than a dozen members of his Syriza party refused to back the plan with some of them denouncing the harsh austerity measures it prescribes less than a week after Tsipras won an anti-austerity referendum. The prime minister said after the vote that his priority would be to complete negotiations with the creditors on a bailout deal.

“Can the Greek government be trusted to do what they are promising, to actually implement in the coming months and years?” Dijsselbloem said. “I think those are the key issues.”

[Bloomberg]