Greece is preparing to take the dramatic step of declaring a debt default unless it can reach a deal with its international creditors by the end of April, according to people briefed on the radical leftist government's thinking.

The government, which is rapidly running out of funds to pay public sector salaries and state pensions, has decided to withhold €2.5 billion of payments due to the International Monetary Fund (IMF) in May and June if no agreement is reached, they said. "We have come to the end of the road . . . If the Europeans won't release bailout cash, there is no alternative [to a default]," one government official said.

A Greek default would represent an unprecedented shock to Europe’s 16-year monetary union only five years after Greece received the first of two EU-IMF bailouts adding up to a combined €245 billion.

The warning of an imminent default could be a negotiating tactic, reflecting the government’s wish to extract the best possible conditions from Greece’s creditors, but it underlined the reality that state coffers are emptying fast.

Unprofessional tactics

Default is a prospect for which other European governments, irritated at what they see as the unprofessional tactics and rhetoric of the Greek government, have also begun to make contingency plans.

In the short term, a default would almost certainly lead to the suspension of emergency European Central Bank liquidity assistance for the Greek financial sector, the closure of Greek banks, capital controls and wider instability.

Although it would not automatically force Greece to drop out of the euro zone, a default would make it much harder for prime minister Alexis Tsipras to keep his country in the 19-nation area.

Germany says it is confident that the currency area is strong enough to ride out the consequences of a Greek default, but some officials acknowledge it would be a plunge into the unknown.

Greece’s finance ministry yesterday reaffirmed the government’s commitment to striking a deal with its creditors, saying: “We are continuing uninterruptedly the search for a mutually beneficial solution, in accordance with our electoral mandate.”

In this spirit, Greece resumed technical negotiations with its creditors in Athens and Brussels yesterday.

The government is trying to find cash to pay €2.4 billion in pensions and civil service salaries this month. It is due to repay €203 million to the IMF on May 1st and €770 million on May 12th. Another €1.6 billion is due in June.

– Copyright The Financial Times Limited 2015