Greek crisis enters critical weekend

The Greek government has submitted what are likely to be its final proposals for unlocking bailout funds, triggering last-ditch negotiations.

The consensus among European officials appears to be that if a deal is not reached this weekend, Greece will pass the point of no return and begin a process of exiting the euro next week.

As European Council president Donald Tusk put it: "The last-chance procedure has just begun."

Tight timetable

The timetable leaves little margin for error. With negotiations having yielded little for five months, the parties will have little more than two days to reach a deal.

As soon as Greece submitted a rough proposal to the European Stability Mechanism on July 8, the European Central Bank was tasked with assessing Greece's financial stability risk and the International Monetary Fund with assessing Greece's debt sustainability.

With the more detailed proposals submitted overnight, Greece's creditors, led by the Eurogroup of European finance ministers, are deciding whether the reform promises are sufficient to unlock funds.

The Eurogroup, which usually convenes once a month, met five times in June in what turned out to be a fruitless attempt to thrash out a deal. It will hold yet another extraordinary meeting on July 11, and another on July 13.

On July 12, a Euro Summit and special meeting of the European Council will bring together heads of state for the second time in the space of a week to discuss any agreement that emerges from the Eurogroup meeting.

An agreement must also be passed by national parliaments, with both Greek and German politicians likely to put up a fight.

Fresh proposals

The new proposals do not appear to depart significantly from those rejected by the Greek people in the referendum on July 5. They do, however, leave open the possibility of restructuring and reducing Greece's burden of debt.

A copy of the proposals, leaked to and published by the Financial Times, shows the Greek government trying hard to establish a credible commitment to reforms, and accepting many of the creditors' toughest demands, including the target of a 3.5% fiscal surplus target by 2018.

Greece's new and more conciliatory finance minister Euclid Tsakalotos said the government would begin introducing reforms "even before the negotiation process begins in earnest" as a "first element in a trust-building exercise". These include pensions and tax reform, and improvements to official statistics.

In the medium term, Tsakalotos said the government was "keenly aware" of its "deficit in certain capacities to carry out these changes". He said the Greek government would turn to international institutions and other member states for help.

Grounds for an agreement?

Potential sticking points remain. The government continues to insist on preferential tax treatment for the remotest Greek islands and wants to make smaller cuts to military spending than the creditors would like. Perhaps the most controversial point, however, is the potential for debt relief.

There were signs of a slight thaw in relations between Greece and Germany, the hardest of the creditors, since Yanis Varoufakis stood down as finance minister. But the German government has so far remained firm in its refusal to countenance a reduction in debt.

By contrast, other institutions have come to recognise Greece's debt will never be sustainable without some form of relief. Tusk has been one of the voices calling for compromise. "Realistic proposal from Athens needs to be matched by realistic proposal from creditors on debt sustainability to create [a] win-win situation," he tweeted on June 9.

IMF chief economist Olivier Blanchard also called for compromise. In a blog post on July 9 he warned the referendum "and its implications for growth" – capital controls were imposed a day later – had made Greece's financing needs even larger.

He also noted the IMF's European partners had previously thought the IMF's estimates of debt sustainability and the need for relief to be too pessimistic.

Blanchard said a new agreement was desperately needed. He argued the wording ought to be similar to that of the deal offered before the referendum, but with "a more explicit recognition of the need for more financing and more debt relief".

Greece has even more explicit backers. French president François Hollande called the proposals "serious, credible and showing a determination to stay in the eurozone". Whether this will be enough to sway the hardliners remains to be seen.