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EU/Athens standoff fuels possibility of Greek default
February 10, 2012 / 3:00 PM / in 6 years

EU/Athens standoff fuels possibility of Greek default

* Pressure on Athens to cut more, win political support

* Vote in Greek parliament could tip the balance

* EU diplomats weigh Greek exit from euro zone more openly

By Luke Baker and John O‘Donnell

BRUSSELS, Feb 10 (Reuters) - In the marathon tennis match that is the Greek debt crisis, the ball is firmly back in Athens’ court and the consensus that a bailout deal will eventually be done is starting to fray a little.

After a ‘deal’ was struck among Greek political leaders on Thursday, euro zone finance ministers in Brussels took one look at Greek Finance Minister Evangelos Venizelos’ figures and promptly told him to go back to Athens and do more.

With trust and goodwill in increasingly short supply, Jean-Claude Juncker, the chairman of the Eurogroup, laid down three demands: a further 325 million euros in spending cuts, approval of the package by the Greek parliament, and a written commitment from the leaders of Greece’s parties that they would stick to the deal beyond April elections.

“In short, no disbursement before implementation,” he said after six hours of talks that diplomats described as pointed.

The immediate concern is that the Greek parliament, which will debate the package on Sunday, could turn it down, reflecting the rising anger of voters, the fact strikes are crippling the nation and political will is rapidly waning.

“I am asking every well-disposed European: when you are in a fifth year of recession, when your country is faltering and its social cohesion is at risk, can the only antidote to the crisis be even higher unemployment and two more years of recession?” Antonis Samaras, leader of the conservative opposition, whose party is ahead in the polls, told supporters on Thursday.

“We should show the Europeans that what is happening in Greece will soon spread to the rest of Europe if we do not change the policy of endless austerity.”

Asked what would happen if the parliament did vote down the deal - which calls for 3.3 billion euros of spending cuts and tax rises to secure bailout support of 130 billion euros - Juncker replied: “The answer is quite simple, it will not reject it. The Greek parliament will not reject the package.”

That may well be the case, and certainly remains the overriding assumption. Juncker has already convened another Eurogroup meeting for Feb. 15 in Brussels, on the expectation that his three conditions will be met by then.

The euro zone has consistently made a virtue of the fact that it has no “Plan B”. Policymakers have said they see no point in planning for something that is too ghastly to contemplate.

But Greece’s persistent inability to meet its targets and the unpredictability of its politics mean an absolute commitment to the euro zone’s demands is far from certain. Greece’s far-right leader, George Karatzaferis, said on Friday he could not back the bailout agreement and called for a reshuffling of the Greek government.

That increases the likelihood that a deal won’t be struck, that Greece will miss a 14.5 billion euro bond repayment on March 20, which could mean a chaotic default, and ultimately shunts the country closer to exiting the euro.

Leaving the Eurogroup meeting late on Thursday, Venizelos presented the options to the Greek population starkly, saying they had until Wednesday - the next Eurogroup meeting - effectively to decide on staying in the single currency.

“If we see the future of our country within the euro zone, within Europe, we should do what we have to do for the programme to be approved ... before major bonds expire in March,” he said.


Among European diplomats and economists, it has become more commonplace in recent weeks to talk about the possibility of Greece leaving the euro zone. On Twitter, the tags #Grexit and #Grout are frequently applied in discussions on the topic.

In a research paper published on Feb. 6, Willem Buiter, the chief economist at Citi, raised his estimate of the likelihood of Greece dropping out of the currency zone to 50 percent over the next 18 months, from 25-30 percent previously.

Companies such as drugmaker GlaxoSmithKline Plc have been sweeping cash from euro zone banks into UK accounts on a daily basis to protect against potential problems in the region - such as instability caused by a Greek default.

But whereas a year ago the possibility of Greece leaving was a major systemic threat, markets have moved to price in the possibility, and the euro zone is better placed in terms of its firewalls to handle such an eventuality and stem the contagion that would flow from it.

That has allowed officials - including Dutch Prime Minister Mark Rutte -- to talk openly about life after a Greek exit, even if doing so seems designed to put pressure on Greece to meet its obligations rather than to drive it out.

That said, some are concerned about the danger policymakers may be creating by discussing a prospect that could bring with it severe unforeseen consequences, such as a pan-European bank run, social unrest or a similar hard-to-contain event.

”It’s surprising to me that they speak so openly about it,“ said Jens Sondergaard, European economist at Nomura. ”You cannot surgically remove Greece from the euro zone. Threatening to do so is playing a dangerous game.

“The bad cocktail of bank deleveraging, low growth and fiscal austerity that worry investors who could invest in the debt of countries like Spain or Italy is still there.”

Not only is it not clear how Greece could leave the euro zone - it is not legally possible to be kicked out, so it would have to choose to do so by itself - but it is also unclear that the rest of the euro zone has weighed up the ramifications.

Greece, a country of 11 million people, would still be sitting near the heart of Europe, with a potentially bankrupt banking system and government, and a population cast adrift by its erstwhile partners. It might stand as a mark of shame of Europe’s inability to cope with problems among its own.

While the financial costs might be contained, including via help from the European Central Bank, the political costs are hard to quantify, yet potentially deep and long-lasting.

The ECB’s creation of nearly half a trillion euros of three-year money has gone a long way to steady markets and it will repeat the offer at the end of February.

“There is a possibility of contagion with a disorderly default but the costs will be smaller now than they would have been before the ECB’s refinancing operations,” said Benedicta Marzinotto, an analyst at Bruegel, a think tank.

“But while the direct costs of a default may be limited, the political costs could be huge. It would see the EU falling apart because Greece cannot leave the euro without leaving the EU. For now, it may just be a threat to accelerate talks with Greece and its private debt holders and the markets won’t react much to it.”

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