ATHENS (Bloomberg) - Greece's talks with international creditors dragged on as the European Commission prepares new forecasts that are expected to underscore the scale of the crisis facing the country's government.
While officials on all sides have reported progress, six days of talks have yet to provide the breakthrough Greece needs to guarantee the flow of liquidity to its banks. The prolonged cash squeeze is threatening the country's fragile recovery, with a person familiar with the talks saying that the Commission is likely to slash its growth and budget estimates when it releases new figures on Tuesday.
The fiscal noose is tightening after weeks of brinkmanship and Prime Minister Alexis Tsipras needs to show European officials that he's willing to find a compromise if he's to head off the risk of capital controls. At the same time, the weakening economic outlook may give his negotiating team more leeway to argue that Greece can't meet the budget targets demanded by its creditors.
"Greek economic conditions are deteriorating quite fast," said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris. "It's negative in terms of the fiscal revenues and the backdrop for the negotiations. But it also provides Greece with some bargaining power when they negotiate the primary surplus for this year and next."
In a sign that leaders are stepping up the drive for an agreement, Greek Deputy Prime Minister Yannis Dragasakis will meet European Central Bank President Mario Draghi in Frankfurt on Tuesday. In Paris, Finance Minister Yanis Varoufakis will have a meeting with his French counterpart Michel Sapin.
European Commission President Jean-Claude Juncker dismissed the notion of a Greek exit from the euro and said Tsipras had to take into account the other countries in the currency.
"Grexit isn't an option," Juncker says in a televised speech in Leuven, Belgium.
In February, the Commission forecast economic growth of 2.5 percent this year and a primary budget surplus at 4.8 percent of gross domestic product. Greece argues that such a surplus target is unachievable and says a goal of 1.5 percent is more realistic.
Greece's banks need some signs of progress in the Brussels talks, which resumed at 5 p.m. today, as the European Central Bank keeps the liquidity they need for survival on a tight leash. A breakdown could prompt the ECB to raise the haircut it demands on Greek collateral as soon as May 6, a decision which would risk pushing the country further toward financial chaos.
Greek government spokesman Gabriel Sakellaridis said Monday that any progress should be accompanied by easier liquidity terms as reforms are not possible in the current conditions.
Greek government bonds were mixed Monday, with the yield on two-year bonds falling 28 basis points to 19.49 per cent while the yield on 10-year bonds was 14 basis points higher at 10.6 percent. The Athens Stock Exchange index rose 0.4 per cent.
The impact of the liquidity squeeze on the economy is likely to emerge in the next week.
Greek GDP figures on May 15 may show the economy went back into recession in the first quarter, after it contracted 0.4 per cent in the last three months of 2014. That would be a setback after Greece snapped a six-year slump that cost it a quarter of its economic output. Jobless data on Wednesday are expected to show that more than one in four Greeks remain out of work.
For now, Sakellaridis said there are signs that the two sides are getting closer on the need to pursue a lower primary surplus than previously targeted.
"The primary surplus target isn't just a number," Sakellaridis said. "Behind these percentages, there are billions of euros that would translate into further austerity."
