By Gabriele Steinhauser in Brussels and Andrea Thomas in Berlin
Greece faces its European creditors at an impromptu summit of
eurozone leaders Tuesday as both sides are scrambling to find a way
to keep the country afloat after its emphatic rejection of tough
bailout terms.
In a sign that Greek Prime Minister Alexis Tsipras is now giving
priority to a rescue deal, the premier ousted his finance chief
Yanis Varoufakis, whose confrontational style had alienated many
other European finance ministers in negotiations, and replaced him
with a less combative official, Euclid Tsakalotos.
Time is fast running out of time to reach a financing agreement
before Greece's banks--already closed for most business for the
past week--bleed dry of cash, threatening to plunge Greece's
battered economy into even-deeper meltdown.
The head of the country's banking association said that banks
would remain closed through Wednesday to stem the flow of money
that Greeks had been pulling out of the banks; few expect them to
open any time soon after that.
Without a new bailout deal, Greece also faces a default July 20
on a EUR3.5 billion ($3.9 billion) bond repayment to the European
Central Bank. If the country is unable to finance its government or
its banks with Europe's help, it could soon be forced to print its
own national currency.
European officials sent conflicting messages on Monday about how
they would respond to Greece's referendum result on Sunday, when
more than 61% of Greek voters rejected creditors' conditions of
further austerity for aid. France led calls to redouble efforts to
reach an agreement with Athens and suggested that debt relief was a
possibility, while Germany signaled that it doesn't want to offer
Greece more lenient bailout terms.
"We have shown a lot of solidarity with Greece and the last
offer [of bailout aid] was also a generous offer," Ms. Merkel said
after meeting French President François Hollande in Paris to
discuss the now-perilous impasse between Athens and its
creditors.
Bolstered by its thumping referendum victory, Mr. Tsipras's
government sought a consensus with opposition parties for a new
bailout proposal to present to Greece's creditors, although it
offered no economic-policy specifics on Monday.
Yet common ground between Greece and other eurozone governments
is more elusive than ever, increasing doubts about Greece's ability
to secure urgently needed financing for its state and banks and
stay in the euro.
Greek voters' resounding rejection of the additional pension
cuts and tax increases that creditors' demanded leaves few ways for
Athens and Europe to secure a fresh bailout deal--unless Germany
and others in Europe drop their resistance to restructuring Greek
debt, many economists say.
The International Monetary Fund is insisting on "comprehensive"
debt relief as an essential component of any further Greek bailout,
a demand that puts it in line with the government in Athens.
Less-intense austerity in Greece is only sustainable if the
country's debt burden is reduced, the IMF has argued.
The White House also renewed its calls for Athens to restructure
its economy and for Europe to offer the beleaguered county hope by
offering better terms on its debt. Keeping Greece in the eurozone
"will require both a package of financing and reforms that will
allow Greece to achieve, or at least be on a path towards, some
debt sustainability," White House press secretary Josh Earnest said
Monday. "But it is also important for Greece to implement the kinds
of reforms and to keep the commitments that they've made
previously."
Debt relief might allow Mr. Tsipras to claim a political victory
and sign up to otherwise politically difficult changes to Greece's
pension and tax system, analysts say. But Germany and other
eurozone governments have so far insisted that Greece complete its
economic overhauls before any debt relief is considered.
Greece's debt burden, and the measures that Athens must offer in
return for fresh loans, are expected to be at the center of
discussions when eurozone leaders gather in Brussels on Tuesday.
Ms. Merkel and Mr. Hollande said it was now up to Greece to submit
proposals on what economic policies it is prepared to follow in
return for renewed support from the other 18 eurozone
countries.
"Time is pressing here and it is important to us that such
proposals must come this week so we can resolve the situation," Ms.
Merkel said.
The ECB on Monday increased its collateral requirements for
Greek banks borrowing emergency funds from Greece's central bank--a
warning shot that has no immediate consequences for the country's
lenders but signals that the ECB wants a political agreement
soon.
Such a deal could prove expensive for other European
governments, both financially and politically. German officials on
Monday reiterated their opposition to forgiving any of Greece's
obligations.
"We are not discussing a haircut" on Greek debt, Martin Jäger,
spokesman for German Finance Minister Wolfgang Schäuble, said
Monday.
France's finance minister was more sympathetic. "I've always
said talking about debt is not a taboo," said Michel Sapin. "The
burden of debt in the coming months and years is too high for
Greece to be able to pick itself up again."
Any deal on the debt would have to come as part of a broader
agreement on more bailout aid. In coming years Greece has to repay
billions of euros of loans from the IMF, which wouldn't be included
in any restructuring.
Germany's vice chancellor and leader of the Social Democrats,
Ms. Merkel's junior coalition partner, struck a pessimistic note on
the likelihood of reaching a deal with Greece quickly.
"The ultimate insolvency of the country seems to be imminent,"
said Sigmar Gabriel, who is also Germany's economy minister. "We
all know that it is pretty much impossible" for Greece to pay back
its debt in the near- and long-term, he said.
There are alternatives to an outright reduction in the face
value of the eurozone's rescue loans, such as cutting borrowing
rates and extending debt maturities. That is what was being
considered by the eurozone in 2012, when Greece last came close to
a euro exit and the bloc's finance chiefs pledged to take steps to
bring the country's debt below 110% of GDP by 2022. The IMF says
that goal can no longer be reached without a haircut, however.
The expiration of Greece's eurozone bailout last week means that
"this offer is not on the table anymore now," said Valdis
Dombrovskis, a top European Commission economic official. Still, he
added: "eurozone countries are ready to look at the Greek
debt."
William Horobin, Ian Talley, Nektaria Stamouli and Brian
Blackstone contributed to this article.
Write to Andrea Thomas at andrea.thomas@wsj.com