Greece prepares for debt default if talks with creditors fail

Greece is preparing to take the dramatic step of declaring a debt default unless it can reach a deal with its international creditors by the end of April, according to people briefed on the radical leftist government’s thinking.

The government, which is rapidly running out of funds to pay public sector salaries and state pensions, has decided to withhold €2.5bn of payments due to the International Monetary Fund in May and June if no agreement is struck, they said.

“We have come to the end of the road . . . If the Europeans won’t release bailout cash, there is no alternative [to a default],” one government official said.

A Greek default would represent an unprecedented shock to Europe’s 16-year-old monetary union only five years after Greece received the first of two EU-IMF bailouts that amounted to a combined €245bn.

The warning of an imminent default could be a negotiating tactic, reflecting the government’s aim of extracting the easiest possible conditions from Greece’s creditors, but it nevertheless underlined the reality of fast-emptying state coffers.

Default is a prospect for which other European governments, irritated at what they see as the unprofessional negotiating tactics and confrontational rhetoric of the Greek government, have also begun to make contingency plans.

In the short term, a default would almost certainly lead to the suspension of emergency European Central Bank liquidity assistance for the Greek financial sector, the closure of Greek banks, capital controls and wider economic instability.

Although it would not automatically force Greece to drop out of the eurozone, a default would make it much harder for Alexis Tsipras, prime minister, to keep his country in the 19-nation area, a goal that was part of the platform on which he and his leftist Syriza party won election in January.

Germany and Greece’s other eurozone partners say they are confident that the currency area is strong enough to ride out the consequences of a Greek default, but some officials acknowledge it would be a plunge into the unknown.

Greece’s finance ministry on Monday reaffirmed the government’s commitment to striking a deal with its creditors, saying: “We are continuing uninterruptedly the search for a mutually beneficial solution, in accordance with our electoral mandate.”

In this spirit, Greece resumed technical negotiations with its creditors in Athens and Brussels on Monday on the fiscal measures, budget targets and privatisations without which the lenders say they will not release funds needed to pay imminent debt instalments.

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The government is trying to find cash to pay €2.4bn in pensions and civil service salaries this month.

It is due to repay €203m to the IMF on May 1 and €770m on May 12. Another €1.6bn is due in June.

The funding crisis has arisen partly because €7.2bn in bailout money due to have been disbursed to Greece last year has been held back, amid disagreements between Athens and its European and IMF creditors over politically sensitive structural economic reforms.

These included an overhaul of the pension system, including cuts in the payments received by Greek pensioners, and measures to permit mass dismissals by private sector employers.

Although debt reduction was a central theme of Syriza’s successful election campaign, the government changed tune after taking office and insisted that it would meet all its obligations to the IMF.

However, Yanis Varoufakis, finance minister, made clear last week that the government took the view that its top priority should be to meet its domestic commitments, including an obligation to continue paying pensions to citizens.