Greece is rushing to pull together a blueprint of reforms to convince European leaders headed by German Chancellor Angela Merkel that it can keep the euro.
The government extended capital controls through to Monday and Prime Minister Alexis Tsipras has until midnight Thursday to present his European colleagues with an economic plan with spending cuts, in exchange for a new European bailout.
The continent’s most indebted country has never been closer to leaving the currency after more than six European leaders made clear this is Greece’s last chance.
“Greece has to demonstrate a willingness to follow through and table some reforms extremely quickly,” Mujtaba Rahman, an analyst at Eurasia Group, said in a note to clients.
Merkel, who as head of Europe’s biggest economy carries the most sway, is willing to let Greece go if Germany doesn’t consider the plans credible, according to two government officials familiar with her strategy, who asked not to be identified discussing private deliberations.
A failure to reach a deal could result in the European Central Bank cutting off funds to Greek banks, forcing the country to issue IOUs or some other medium of exchange to prevent economic collapse, gradually creating a parallel currency to replace scarce euros.
Market reaction has been muted, potentially strengthening creditors’ bargaining position. The euro fell 0.6 percent Wednesday.
The leaders of all 28 European Union countries will meet in Brussels on Sunday to decide their response to Greece’s proposals. The European Central Bank, which on Wednesday said it was leaving unchanged its level of aid to Greek banks, will meet Monday to consider its own next moves.
Sunday’s gathering may represent the climax of the five-year effort to contain Greece’s debts, which exceed 170 percent of gross domestic product. A departure from the euro would represent a severe blow to the currency, which was designed to be irrevocable, and to the broader European project.
Securing a deal with creditors will almost certainly require Tsipras and his Coalition of the Radical Left, or Syriza, to stomach reforms the coalition has resisted since coming to power in January. Greek voters emphatically rejected a program of spending cuts and tax increases in exchange for a new bailout in a referendum last weekend.
On Wednesday, Greece put the first formal steps of its latest plea for a bailout into motion with a letter to the European Stability Mechanism, the body that coordinates financial assistance to member states.
After months of often contentious interactions with creditors, the document signed by the new finance minister, Euclid Tsakalotos, struck a relatively conciliatory tone. It said Greece planned to honor all its debts and introduce tax and pension reforms as soon as next week. Although the document was thin on details, pension cuts had previously been characterized by Tsipras as one of the “red lines” Greece would not cross.