May 11, 2015 / 11:09 AM / in 2 years

Germany floats Greek referendum on reform, others doubt timing

People make their way past a small European Union flag on Constitution (Syntagma) Square, with the parliament building seen in the background, in Athens May 11, 2015.Alkis Konstantinidis

BRUSSELS (Reuters) - EU paymaster Germany suggested on Monday that Greece might need a referendum to approve painful economic reforms on which its creditors are insisting, but Athens said it had no such plan for now and others warned a vote could delay vital aid.

Greece calmed immediate fears of a default by making a crucial 750 million euro payment to the International Monetary Fund a day early. But Finance Minister Yanis Varoufakis said the liquidity situation was "terribly urgent" and a deal to release further funds was needed in the next couple of weeks.

Euro zone finance ministers welcomed some progress in slow-moving talks on a cash-for-reform deal between Athens and the IMF, the European Commission and the European Central Bank but said more work was needed to each a deal.

"We acknowledged that more time and effort are needed to bridge the gaps on the remaining open issues," they said in a short statement after spending barely an hour on a progress review on the negotiations behind held among senior officials.

They remain far apart on pension cuts, easing layoffs in the private sector and over budget targets for this year and next.

Euro zone governments have previously opposed a referendum, saying there is no time and it could destabilize financial markets and trigger a run on struggling Greek banks.

When former Prime Minister George Papandreou surprised EU partners by proposing a plebiscite in 2011 at the height of the euro zone debt crisis, he was summoned to emergency talks with leaders of France and Germany and told bluntly to drop the idea.

But with Greece's leftist-led government refusing to budge on unpopular reforms that run counter to its electoral mandate, German Finance Minister Wolfgang Schaeuble said securing public backing for the necessary sacrifices might be useful.

A referendum could make it easier for Prime Minister Alexis Tsipras to climb down from his election promises.

"If the Greek government thinks it must hold a referendum, then let it hold a referendum," Schaeuble said on arrival at a meeting of euro zone finance ministers.

"That might even be a helpful measure for the Greek people to decide whether it is ready to accept what is necessary, or whether it wants something different."

Eurogroup chairman Jeroen Dijsselbloem poured cold water on the idea, warning that a referendum could delay the disbursement of some 7.2 billion euros in urgently needed frozen bailout aid.

"Presumably if you have a referendum you will not start implementing before you have done it and then it doesn't seem to make sense," the Dutch finance minister said after the meeting.

Sources familiar with ECB thinking said Monday's Eurogroup statement was not a sufficient basis for the central bank to allow the Greek government to sell more short-term Treasury bills to ease its funding crunch, as Athens had sought.

UNREALISTIC

Hinting at growing difficulties in persuading conservative German lawmakers to go on funding Greece, Schaeuble said it was unrealistic to think any parliament in Europe would agree without the backing of the IMF.

Athens has accused the global lender of setting tougher targets than the European creditors on pension and labor reforms and a primary fiscal surplus. The three institutions have denied any internal differences.

European Economics Commissioner Pierre Moscovici cited progress on reforming value added tax, creating an independent tax authority and dealing with non-performing loans but said gaps remained, notably on pension changes and "parts of the program that the Greeks do not accept".

Varoufakis, who held private talks with Schaeuble before the meeting, said a referendum was "a tool which is available" but it was not on the radar screen for now as far as he was aware.

Schaeuble said there had been little or no progress on substance in the negotiations. Any release of frozen bailout funds depended on representatives of the three creditors certifying implementation of the reforms, not just promises.

Euro zone officials say the real deadline for a deal is end-May to enable parliamentary approval in some euro zone countries, notably Germany, in time to release the remaining funds before the program expires at the end of June.

Elected in January on promises to end austerity and scrap the international bailout, the government is refusing to agree to pension cuts, raise the retirement age, or ease layoffs in the private sector. It is also at odds with creditors on the size of the primary budget surplus, which excludes debt repayments, and on longer-term financing.

Varoufakis was sidelined from the conduct of the talks after he alienated fellow ministers with outspoken interviews and economics lectures, climaxing with a clash last month at a Eurogroup meeting in Riga.

Tsipras shook up the negotiating team and made some concessions on restarting privatizations and harmonizing value-added tax. But he has so far balked at crossing the "red lines" of what he calls his popular mandate.

Two-year Greek bond yields edged up to around 21.5 percent on Monday as nervous investors weighed the risk of a default. Italian, Spanish and Portuguese bond yields also ticked up.

A Reuters poll of traders, taken before the IMF repayment, found that the chance of Greece leaving the euro zone was less than one in four, down from a 40 percent possibility they assigned two weeks ago.

Additional reporting by George Georgiopoulos and Angeliki Koutantou in Athens, Francesco Guarascio, Paul Taylor, Tom Koerkemeier, Philip Blenkinsop, Robert-Jan Bartunek and Alastair Macdonald in Brussels, Ingrid Melander in Paris and Gergely Szakacs and Krisztina Than in Budapest; Writing by Paul Taylor; editing by Anna Willard, David Stamp and Alastair Macdonald

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