Greek euro exit chances increase as EU delivers ultimatum

Brussels: Greece is on a collision course with the Eurozone’s creditor powers after emergency talks ended in acrimony on Monday night, triggering the most serious political crisis since the launch of the single currency.

The Leftist Syriza government reacted with fury to eurozone demands that it must stick to its austerity plan, describing the draft text as “absurd and unacceptable”.

Yanis Varoufakis, the Greek finance minister, said Eurogroup finance ministers had ignored a deal already agreed with the European Commission for a four-month delay and a “new contract for growth”, returning instead to old demands.

“The only way to solve Greece is to treat us like equals, not a debt colony,” he said, predicting that European Union authorities would soon have to withdraw the “ultimatum” issued to Greece. The talks were halted after four hours of stormy exchanges, risking a showdown that could precipitate the biggest default in world history and force Greece out of the euro by the end of the month.

Varoufakis said Syriza had won a landslide election victory vowing to overthrow the EU-IMF troika memorandum and could not betray Greek democracy.

“It would be an act of subterfuge to promise our partners that we will complete a programme we were elected to challenge,” he said.

“This programme has failed to stabilise Greece, has generated a major humanitarian crisis, and has led to a debt deflationary spiral.”

Jeroen Dijsselbloem, the head of the Eurogroup, was unyielding in comments afterwards, demanding that Greece “honour its obligations”.

He said the ball is now in Greece’s court. “They have to make up their minds,” he said, leaving the door open for another meeting on Friday.

The Eurogroup text said “the Greek authorities have indicated that they intend to successfully conclude the programme taking into account the new government’s plans”.

A leaked copy showed these words crossed out by Varoufakis, who peppered the paper with angry annotations. It went on to say that the Greeks would toe the line on “tax policy, privatisation, labour market reforms, financial sector and pensions”. It said that Greece must continue with “fiscal surpluses” imposed by the troika, meaning that Athens would have to raise the primary budget surplus from 1.5 per cent of GDP in 2014, to 3 per cent this year, and 4.5 per cent next year. This would prevent Syriza from carrying out its welfare and anti-poverty programmes. It would tighten fiscal policy at a time when the country is already reeling from six years of depression.

The US appeared to back the Greeks on this last week, saying that fiscal consolidation had already gone far enough. Greece has few open allies in the Eurogroup.

Germany fears that austerity discipline will collapse across southern Europe if Syriza wins concessions, while Spain, Portugal, and Italy fear populist backlashes in their own countries. Wolfgang Schauble, the German finance minister, earlier accused the Greek government of “behaving irresponsibly” by threatening to tear up agreements made with the eurozone.

assumptions that Syriza will back down under pressure is highly risky.

Varoufakis wrote in the New York Times that he is not playing academic “game theory” and is not bluffing. Syriza is riding a wave of sympathy at home that extends far beyond its electoral base.

The latest polls show that 81 per cent back the government’s refusal to buckle to Brussels, and that the party would win an outright majority in parliament if there are fresh elections.

The Eurogroup’s apparent unity belies deep differences. France’s finance minister, Michel Sapin, said the Germans were “in a certain sense” right to insist that Greece abide by the rules. But he then said: “The Greeks are right, and I agree with them, that they have just changed the government, and not in order to carry on as before. We have to find a workable way to sort this out together.”

For all the bluster, the Eurogroup text did say the creditors would look “favourably” on a request for a six-month technical extension to Greece’s bailout, even suggesting that Athens could draw on €11 billion (Dh46 billion) set aside for bank recapitalisation. Greece must repay €22.5 billion this year, starting with €4 billion owed to the International Monetary Fund over the next six weeks. In June, July, and August it has to pay back €11.4 billion, mostly to the European Central Bank.

Whether Greece can last even this long depends entirely on liquidity support for the Greek financial system from the ECB. Frankfurt has already sent a warning signal by refusing to accept Greek-backed bonds as collateral for fresh loans at its normal lending window, but is still maintaining emergency liquidity assistance (ELA) for Greek banks.

The ECB’s governing council could cut this off at any time by a two-thirds majority vote, which would lead to a collapse of the Greek banks and force Greece out of the euro. But it would be unthinkable for the ECB to take such a decision without clear backing from EU leaders. Berkeley professor Barry Eichengreen, a leading currency expert, said Europe would pay a “very high price” if Greece is ejected from the euro. “I wouldn’t invest a single penny in Europe. The risks are too big,” he said.