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Isolated Greece rejects bailout extension

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Reuters ATHENS/BRUSSELS
Last Updated : Feb 06 2015 | 10:55 PM IST

By Lefteris Papadimas and Jan Strupczewski

ATHENS/BRUSSELS (Reuters) - Greece's new leftist-led government, isolated in the euro zone and under pressure from the European Central Bank, vowed on Friday not to accept any deal in crunch talks next week that keeps its current international bailout programme in place.

Instead, a government official said Finance Minister Yanis Varoufakis would ask for a "bridge agreement" to keep state finances running until Athens can present a new debt and reform programme.

"We will not accept any deal which is not related to a new programme," said the official, who asked not to be named.

Varoufakis returned empty-handed from a tour of European capitals in which even left-leaning governments in France and Italy insisted Greece must stick to commitments made to the European Union and International Monetary Fund and rejected any debt write-off.

Euro zone finance ministers will discuss how to proceed with financial support for Athens at a special session next Wednesday ahead of the first summit of EU leaders with new Greek Prime Minister Alexis Tsipras the following day.

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Participants said no progress was made at a preparatory meeting of senior finance ministry officials in Brussels on Thursday because Greece and its euro zone partners were so far apart.

"It was Greece against all others, basically one versus 18," one official said.

Athens' partners broadly lined up in support of a hardline German document rejecting any roll-back of reforms or commitments made by previous Greek governments.

Tsipras and his ministers promised in their first days in office to raise the minimum wage, re-hire some sacked government employees and stop some privatisations.

This clashed with conditions set by the International Monetary Fund and euro zone countries, which have lent Athens a total of 240 billion euros ($270 billion).

U.S. WEIGHS IN

Adding to pressure on Tsipras, the United States told Greece through its ambassador on Friday to work cooperatively with European partners and the IMF and "exercise fiscal prudence".

The new premier will need to tread a fine line when he delivers a policy speech to parliament on Sunday and seeks a vote of confidence on Tuesday.

The ECB raised the stakes this week by deciding to bar Greek banks from using Greek government bonds as collateral to borrow from the central bank as long as there is no prospect of an agreed bailout programme.

That makes lenders dependent on more costly emergency liquidity from the Greek central bank, which the ECB can stop at any time.

Greek bank shares fell further on Friday at the end of a week of wild trading swings, as brokers cut their forecasts on worries over dwindling deposits and brinkmanship between Athens and its creditors.

Portugal, which emerged from its own EU/IMF bailout last year, joined a chorus of countries insisting that Greece must stick to the austerity medicine as Lisbon had done and respect past agreements with EU partners.

Portuguese Economy Minister Antonio Pires de Lima rejected any kind of debt renegotiation for Greece, saying Athens must play by the rules established by euro members, especially considering his own country's sacrifices.

He told the Reuters Euro Zone Summit that Lisbon had chosen a route "which was not the easiest one" to recover credibility and return to growth, and "that is also our attitude to the situation in other countries".

The Portuguese minister said he was not concerned about any risk of contagion from Greece to his own country, pointing to Lisbon's bond yields which are now trading near record lows.

"The project of the single currency is not at risk," he said. "At the end of the day, Greece is master of its own destiny."

The Greek official said Varoufakis was expecting tough treatment from his partners at next Wednesday's meeting, including a demand to extend the existing bailout programme, which expires at the end of February.

This is anathema to the Greek government, led by Tsipras' left-wing Syriza party, that came to power on a wave of anti-austerity anger in elections last month.

"It's expected, obviously there is pressure as part of a dynamic situation, we are in a negotiation. But we believe that we will reach a mutually beneficial solution soon," said a separate official, from the prime minister's office.

Euro zone officials say Greece is free to design its own reforms in line with Syriza's campaign promises, as long as the result is in line with commitments to stronger public finances, debt repayment and reforms.

"The overall policy mix may reflect the priorities of Syriza. But it has to make sense financially," a second official said.

Time to reach a deal is short. Some analysts say Greece could run out of cash as early as March without further euro zone help.

"Greece's financing needs over the next five years may amount to 30-35 billion euros," Unicredit bank said in a research note.

"However, if we set the primary surplus at 1-1.5 percent of GDP and assume that privatisations will stop, as requested by the Greek government, overall financing needs would rise to 60 billion euros," Unicredit said.

Both Goldman Sachs and Deutsche Bank said their base case was that Greece would remain in the euro zone, but a rise in deposit outflows had raised risks of a crisis.

(Additional reporting by Jeremy Gaunt and Costas Pitas in Athens and Lionel Laurent in London; Writing by Paul Taylor; Editing by Giles Elgood and Pravin Char)

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First Published: Feb 06 2015 | 10:39 PM IST

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