By Gabriele Steinhauser And Matthew Dalton
BRUSSELS--Eurozone leaders set Greece a Sunday deadline to come
up with new and even-tougher economic measures if the country wants
to avoid defaulting on the European Central Bank and crashing out
of the currency union.
As a sweetener for such a deal, leaders raised the possibility
of some short-term financing to help Athens make a July 20 payment
and--most important for Greek Prime Minister Alexis Tsipras--action
down the road to relieve Greece's crushing debt burden.
Obstacles to an agreement that keeps Greece in the eurozone
remain high, however. Most notably, the policy overhauls and budget
cuts demanded go beyond those that were resoundingly rejected by
Greek voters in a referendum last weekend.
German Chancellor Angela Merkel said after Tuesday's emergency
summit of eurozone leaders that it is up to Greece to act. "Of
course, at the very end, one will have to discuss how debt
sustainability can be recreated but not by saying first 'How do we
close the gap?' but "What can Greece do?' " she said.
She added that Mario Draghi, the ECB president, made clear to
leaders at the summit that Sunday would be "the right moment to
take decisions" for Greece to avoid a meltdown of its banking
system.
Mr. Tsipras said that the negotiation process would be fast. "I
believe there will be a solution by the end of the week at the
latest," he said.
Leaders said that the broad outlines of such an agreement needed
to be nailed down at a new summit on Sunday of the leaders from the
entire European Union, including nine countries that aren't in the
eurozone.
Without some new cash in the coming weeks, Greece won't be able
to make the EUR3.5 billion ($3.8 billion) bond payment to the ECB,
leading to the country's second default in less than a month.
Such a nonpayment could push the ECB to cut emergency lending to
Greek banks--a move that would send the country's financial system
into meltdown and force the government to print its own money to
recapitalize them.
Greek banks have been shut for more than a week, after the ECB
put a limit on the emergency loans they had been drawing to buffer
growing deposit outflows. Cash withdrawals from ATMs have been
limited to EUR60 a day and depositors are unable to transfer money
abroad.
Some short-term funding and the prospect of a longer-term
bailout deal from the rest of the eurozone could allow Greece--and
the ECB--to let banks reopen and normal economic activity in the
country to resume.
Getting there, however, would require a formidable turnaround by
Mr. Tsipras and his government.
In addition to the pension cuts and tax increases, rejected in
the referendum, a new rescue package to keep the government afloat
for two to three years would require overhaul measures that had
dropped out of negotiations in recent months.
These, Ms. Merkel said, include changes to labor laws to make it
easier to fire workers, changes to product markets and the
privatization of state assets.
"This isn't about a program from today, or from yesterday or
from 10 days ago, for a program until November...this program is,
according to the now-withdrawn Greek request, meant to be two years
long, so it is a multiyear program," Ms. Merkel said.
"That such a multiyear program has to entail more commitments is
in itself clear," she added.
Only once that is clear, leaders would look at ways to make
Greece's debt sustainable again, Ms. Merkel said, adding that any
debt relief wouldn't include cuts to the nominal value of rescue
loans.
But talks on details of a final plan could drag on for
weeks.
"The short-term deal is only possible in a longer-term deal,"
French President François Hollande said at his postsummit news
conference. "And the short-term deal has conditionality."
A senior French official pushed the idea that Greece could get
emergency financing by passing just the budget measures of a
potential agreement through the Greek parliament, and passing
non-budgetary, more structural changes later. But Germany may not
accept that.
Emboldened by Sunday's referendum, Mr. Tsipras came to Brussels
to present his eurozone counterparts a proposal for interim
financing until the end of the month, a senior Greek government
official said.
That would give Greece and its creditors time to work out a
longer-term financing deal and avoid defaulting on the ECB.
Mr. Tsipras was hoping to use the leverage from his referendum
victory to win enough of a political nudge from the summit that
would allow the ECB to keep its lifeline in place.
He raised the idea of interim financing with Ms. Merkel, Mr.
Hollande and Jean-Claude Juncker, head of the European Union's
executive Commission, ahead of the summit, the Greek official
said.
Whether the new reform commitments from Mr. Tsipras were
credible "I can't say today." Ms. Merkel said later.
At a meeting of finance ministers earlier Tuesday, Greece's new
finance chief, Euclid Tsakalotos, read out proposals the government
had presented last week, three European officials said.
But the new finance minister's performance raised some hopes
among ministers that things had changed. "The minister Tsakalotos
came for the first time in this meeting and he adopted clearly a
constructive, moderate listening mode, which I think was
appreciated by all the colleagues," Pierre Moscovici, the EU's
economics commissioner said.
The International Monetary Fund, which Greece technically
defaulted on last month, has said "comprehensive" debt relief
should be included in any further bailout. But divisions still run
deep in Europe.
Leaders warned Tuesday that failure to strike a deal could
catapult Greece outside the common currency.
"We have a Grexit scenario prepared in detail," said Mr.
Juncker.
Nektaria Stamouli and Todd Buell contributed to this article
Write to Gabriele Steinhauser at gabriele.steinhauser@wsj.com
and Matthew Dalton at Matthew.Dalton@wsj.com