Grexit is a possibility, warns head of IMF

The head of the International Monetary Fund has warned that a Greek exit from the eurozone is a “possibility” as debt talks reach a critical stage.

Christine Lagarde said a deal with Athens was unlikely to be reached over the next few days, as the indebted country strives to meet a 5 June deadline for a €305m (£218m) payment to the IMF. In an interview with the Frankfurter Allgemeine Zeitung, the IMF managing director said: “A Greek exit is a possibility.”

Lagarde added that such a step would “not be a walk in the park”, but would “probably not” mean the end of the euro.

The IMF head is attending a meeting of finance ministers and central bankers from the G7 leading nations in Dresden, where the crisis in Greece was discussed, though it was not on the formal agenda.

Her comments came as Athens’ lead negotiator admitted Greece required intervention at the highest political level in Europe in order to seal an agreement after acknowledging that ongoing negotiations in Brussels would not achieve a final deal.

Euclid Tsakalotos, the deputy foreign minister who is now leading Greece’s negotiating team, said both sides were drawing closer together but a final “trade-off” would have to take place between senior political figures.

Greek ministers have admitted next week’s €305m payment cannot be met without securing a deal to release the €7.2bn of loans outstanding on the country’s current bailout programme.

Tsakalotos, speaking from the Belgian capital, where the so-called Brussels Group of technical teams resumed talks on Thursday, said: “The [two sides] will never converge completely but the general impression is that they are converging.

“There is now a reasonable chance that whatever convergence still needs to be done after the Brussels Group will be done at a higher level where politicians will be called in for the final trade-off and will bridge the gap.”

Tsakalotos has been coordinating Athens’ negotiating team since last month, when the combative finance minister, Yanis Varoufakis, was sidelined after repeatedly riling Greece’s creditors with his controversial public statements.

Of the two-and-a-half-hour talks Alexis Tsipras, the Greek prime minister, had with his French and German counterparts on the sidelines of the EU summit in Latvia last week, Tsakalotos added: “The meeting with Hollande and Merkel in Riga went very well.”

But the Oxford-educated economics professor suggested the negotiators could only go so far. “The Brussels Group works in little boxes, ticking off [issues], there is no trade-off there,” he said, adding that talks on Thursday would focus on VAT.

For Athens, he said, negotiations boiled down to “what we are willing to give, what are our red lines and what we are going to get”.

Tsakalotos, who has infused a more measured tone into the talks, blamed some of the lack of headway on the hardened stance of the IMF. On Wednesday, Tsipras accused lenders of holding back progress because of their different approaches.

“The IMF is being very, very tough on all the issues and not really engaging in proper discussion,” Tsakalotos said.

The IMF is said to be insisting that Athens must be offered debt relief if its future repayments are to be manageable, but that would mean lenders, including the European Central Bank, writing off some of the Greek debts they own. That proposal is being resisted by other members of what was known as the creditors’ “troika” of the IMF, the EU and the ECB, before Syriza insisted that the hated term be dropped.

Lagarde’s downbeat tone contrasted with suggestions from a government spokesman earlier in the day that a deal could be done as early as this Sunday.

Depending on developments, the Greek side may well request a euro group meeting of finance ministers on either the 3 June or 4 June – the eve of the first in a series of loan instalments it must make to the IMF next month. Any agreement could then be ratified by European leaders at an EU summit later in the month.

Tsakalotos repeated that the leftist Greek government was not interested in drafting an agreement that would ensure liquidity only for June when it faced such a heavy debt repayment schedule throughout the summer, with repayments on ECB bonds worth €6.7bn due in July and August alone.

“The two negotiations [long- and short-term] are de facto merging given that it is now 28 May,” he said. “We are now looking at a medium-term deal, maybe a year, so that we are given some macro-economic space to carry out our programme.”

Syriza’s coalition government was elected on a wave of popular support with a pledge to reject austerity and reverse some of the painful reforms imposed by the troika. But it looks increasingly likely that it will have to compromise.

The consequences of the failure so far to secure a deal were underlined in the ECB’s twice-yearly financial stability review, published earlier on Thursday. “Sovereign risks emanating from Greece, in particular, have increased sharply owing to heightened political uncertainty over the past six months, while the banking sector in Greece has witnessed substantial deposit outflows, a loss of access to the wholesale funding market and deteriorating asset quality,” the report warned.