The government of Greek Prime Minister Alexis Tsipras drafted a new proposal it hopes will convince creditors to let the country stay in the euro.

The package of economic reforms and spending cuts, put together with help from France, was approved by a majority of the country's cabinet ministers and is due to be submitted by midnight Brussels time. The proposals are set to be discussed at a summit of European Union leaders Sunday to determine whether the country will get a new bailout, or be forced to leave the single currency.

Although the odds of a so-called Grexit have climbed, “we continue to see Greece staying in the euro as marginally more likely, not least because the majority of Greeks prefer so,” Deutsche Bank analysts wrote in a note to clients. “Europe is intent on forcing an outcome either way.”

Market reaction suggested investors believe a deal can be done, or that the European Central Bank (ECB) can successfully contain the fallout if one isn't. The benchmark Stoxx Europe 600 Index rose 2.2 percent and Greek, Portuguese, and Italian bonds rose. The euro slid 0.7 percent to $1.101

Pressure has been mounting on Greece's creditors to make the country's debt more manageable, giving it a chance to rebound from a crisis that has erased a quarter of its economy.

“Realistic proposal from Athens needs to be matched by realistic proposal from creditors on debt sustainability to create win-win situation,” European Union President Donald Tusk said in a Twitter post Thursday.

The U.S. wants to see debt sustainability in Greece, John Kirby, State Department spokesman, told reporters in Washington Thursday.

Greece has been nonetheless closer than ever to departing the euro, with a broad cross-section of European officials speaking openly about such an eventuality.

In an interview with an Italian newspaper on Thursday, ECB president Mario Draghi characterized the situation as “really difficult,” while Ardo Hansson, a member of its governing council, said Greece's situation was “quickly and sharply deteriorating.”

German Chancellor Angela Merkel, for her part, was doubtful Tsipras would deliver a credible plan, and was willing to accept a Greek exit, according to two government officials familiar with her strategy asking not to be identified discussing internal deliberations. Greek voters last weekend emphatically rejected austerity measures in a referendum called by Tsipras.

Whether Greece can expect a writedown of its outstanding debts, which exceed 170 percent of gross domestic product, remains a key point of contention.

Is Debt Relief an Option for Greece?

The European Commission's vice president for the euro, Valdis Dombrovskis, said member states are open to considering debt relief for Greece. Principal writedowns, though, would be difficult to get past conservative figures including German Finance Minister Wolfgang Schaeuble.

He said Thursday he's less optimistic than the French about “re-profiling”—generally understood to mean giving debtors more time to pay off loans—as a solution for Greece. France, unlike Germany, has recently struck a relatively dovish tone. “We think debt relief of some form will be on the table,” but structured in a fashion capable of winning German backing, Royal Bank of Scotland analyst Michael Michaelides said in a research report.

Even if Tsipras and creditors can reach a basic agreement, his greatest challenge may still lie at home. European leaders are likely to insist that reform measures be passed into binding legislation by the Greek parliament, where lawmakers from Tsipras's ruling Coalition of the Radical Left, or Syriza, might vote against them.

A half-day meeting of Syriza lawmakers has been convened for Friday morning, in which the premier is expected to discuss the proposals to creditors.

The party was elected in January after it promised to fight the successive spending cuts and tax hikes that had been required for previous bailouts.

“Greece is obviously working to secure an immediate deal, but it must be a deal that opens a window out of the current crisis,” Energy Minister Panagiotis Lafazanis, a hard-line Syriza member, said at a conference in Athens Thursday. “We don't want a third memorandum with tough austerity measures.”

–With assistance from Rebecca Christie, Ian Wishart, Corina Ruhe, Karl Stagno Navarra, Marine Strauss, Stephanie Bodoni, Jonathan Stearns, and James G. Neuger in Brussels; Arne Delfs in Berlin; Eleni Chrepa, Marcus Bensasson, and Paul Tugwell in Athens; Constantine Courcoulas in Istanbul; and Eshe Nelson in London.

Instant Insights /

Greece's Last-Ditch Effort to Stay in Euro

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