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As $1.8 Billion Payment Deadline Looms, Greece and Europe Are Miles Apart on a Debt Deal

Europe is threatening capital controls if Greece doesn't pay back its debt.

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At the start of the week, there was optimism that Greece and its creditors would reach a deal for Athens to pay back the $1.8 billion it owes by the end of the month. Consider those hopes dashed.

If no deal is reached by the end of the month, the European Union could kick Greece out of the eurozone. On Wednesday, the Greek central bank warned that it’s a “historic imperative” that Greece come to an agreement with the institutions it owes. Even U.S. Treasury Secretary Jack Lew telephoned Greece's prime minister, Alexis Tsipras, on Tuesday, urging him to compromise.

When Tsipras meets Thursday with European finance ministers, they’ll find themselves miles apart. For now, it appears as if the EU is stopping one step short of showing Greece the door. But that doesn’t mean they’re letting Tsipras off the hook.

At the start of the week, there was optimism that Greece and its creditors would reach a deal for Athens to pay back the $1.8 billion it owes by the end of the month. Consider those hopes dashed.

If no deal is reached by the end of the month, the European Union could kick Greece out of the eurozone. On Wednesday, the Greek central bank warned that it’s a “historic imperative” that Greece come to an agreement with the institutions it owes. Even U.S. Treasury Secretary Jack Lew telephoned Greece’s prime minister, Alexis Tsipras, on Tuesday, urging him to compromise.

When Tsipras meets Thursday with European finance ministers, they’ll find themselves miles apart. For now, it appears as if the EU is stopping one step short of showing Greece the door. But that doesn’t mean they’re letting Tsipras off the hook.

Reports in German media indicate the European Union is poised to impose capital controls on Greece. That would limit credit card transactions, ATM withdrawals, and foreign money transfers which, in theory, puts pressure on Athens to pay back what it owes.

This was done in Cyprus in 2013, when banks there were on the verge of bankruptcy because of bad investments in Greek bonds. Cyprus agreed to restrictions in exchange for a bailout from the European Union. The last of the controls was lifted in April.

“It is all about this week. If there’s no agreement by Sunday, it’s very unlikely Greece can avoid Cyprus-style capital controls, and potentially much worse,” Mujtaba Rahman, the head of the Eurasia Group’s European practice, told FP.

The only problem with this strategy is that Greece would have to pass a law agreeing to the restrictions. And Greek politicians are hardly in an accommodating mood.

When news of the capital controls broke, Tsipras accused Europe of trying to bring about regime change in Athens. He called on European officials to “adhere to realism.”

Greece insists it has the money to pay its debt to the European Central Bank, the International Monetary Fund, and the European Commission but won’t make cuts to its bloated pension program. Its creditors insist the Greek retirement system be reformed if Athens wants to get its hands on more of a $270 billion bailout package created in 2010, when it became clear Greece was about to go belly up.

But European officials aren’t budging. Publicly, they’re putting on a brave face, saying they are insulated from a Grexit.

“It won’t work without Greece moving significantly,” German Foreign Minister Frank-Walter Steinmeier said in Berlin Wednesday.

But European bond yields tell a different story. Italian, Spanish, and Portuguese yields all spiked this week amid concerns of Greek contagion.

The Greeks “don’t want to deal with the technicalities of reforms,” Rahman said. “It’s not about not wanting an agreement: They want one but one on their terms and a political one.”

Photo credit: Matt Cardy/Getty Images

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