A New Greek Proposal? (updated)

There are reports this morning that the Greek government has made a new proposal (PDF) to break the deadlock, involving a two-year bailout program to be funded from European facilities (e.g., ESM) and with explicit debt relief, but without the IMF financial involvement. Eurozone finance ministers will review the proposal in a call tonight.

Details are still limited, and I do not expect any agreement today (i.e., the IMF payment will be missed).  But a few initial thoughts.

1. For this to be acceptable to creditors, the Greek government would need to accept the policy proposal tabled by creditors on Friday, with very minor modifications. This would represent an extraordinary U-turn by the Greek government, and breach all their previously stated red lines. Initial reports on the proposal do not mention policies, only the request for an extension of financing that on its own would be rejected.  I have no sense of the government’s motives, but it is possible that the significant distortions associated with the banks closing were a factor in the decision to make a new proposal.
2. If agreement can be reached on policies and there is a commitment to renewed negotiations on financing/debt relief (the German government has said actual financing negotiations must come after the referendum), the government could then campaign for a yes vote in this weekend’s referendum, relieving pressure on the government to step down if the yes side wins. Agreement on policies would potentially allow the ECB to increase emergency liquidity under its ELA program, a necessary condition for banks to reopen.  This is a very narrow path to navigate.
3. Because the previous bailout program expires tonight, entirely new financing arrangements would need to be devised. On the negative side, this is a much heavier lift because a new financial program would need fresh approval from parliaments already exhausted by the Greek saga. On the positive side, an underappreciated point is that by starting with a clean sheet of paper it gives parity to debt relief proposals that had been ruled out previously because they were not in the program.  I think both the IMF and U.S. government would support the greater emphasis on debt relief.
4. Another last minute and chaotic scramble—not a great way to run policy.