WRAPUP 7-Germany holds up Greek bid for euro zone loan extension

* Athens uses vital EU wording to request extension

* Germany dismisses proposal as “not a substantial solution”

* Athens questions whether Berlin speaks for euro zone

* Euro zone officials to discuss whether letter meets terms

* Greek bailout deal due to expire on Feb. 28 (Recasts, adds Merkel-Tsipras phone call, Gabriel)

By Renee Maltezou and Jan Strupczewski

ATHENS/BRUSSELS, Feb 19 (Reuters) - Germany rejected a Greek proposal for a six-month extension to its euro zone loan agreement on Thursday, saying it was “not a substantial solution” because it did not commit Athens to stick to the conditions of its international bailout.

Berlin’s stance set the scene for tough talks at a crucial meeting of euro zone finance ministers on Friday when Greece’s new leftist-led government, racing to avoid running out of money within weeks, will face pressure to make further concessions.

As the biggest creditor and EU paymaster, Germany has the clout to block a deal and cast Greece adrift without a financial lifeline, potentially pushing it towards the euro zone exit. But officials in other capitals saw the German response as tactical and forecast a deal by the weekend after more wrangling.

A Greek official said Prime Minister Alexis Tsipras had a 50-minute telephone call with German Chancellor Angela Merkel on Thursday, believed to be their first substantive exchange since the radical Athens government was elected on Jan. 25.

“The conversation was held in a positive climate, geared towards finding a mutually beneficial solution for Greece and the euro zone,” the official said. A German spokesperson confirmed the call but would not comment on the contents.

Earlier, Finance Minister Yanis Varoufakis formally submitted the request after days of backstairs negotiations with the European Commission and the chairman of the Eurogroup of finance ministers of the currency bloc.

While officials in Brussels welcomed the effort by a government elected on an anti-austerity platform to find a workable formula, German officials said it was full of loopholes with no commitment to respect the bailout terms.

Finance Minister Wolfgang Schaeuble’s spokesman said the Greek proposal did not meet the criteria agreed by the Eurogroup and “goes in the direction of a bridge financing without fulfilling the demands of the programme”.

Economy Minister Sigmar Gabriel said what mattered was what economic reforms Greece was prepared to make, adding: “The letter can only be the start of negotiations.”

The objections from Berlin drew a tart response from Athens, which questioned whether Germany spoke for the other euro zone finance ministers.

“Tomorrow’s Eurogroup has only two options: either to accept or reject the Greek request,” a Greek official said. “It will then be clear who wants to find a solution and who doesn’t.”

With Greece’s EU/IMF bailout programme due to expire in little more than a week, the Tsipras government urgently needs to secure a financial lifeline to keep the country afloat beyond late March.

Athens asked for an extension to its “Master Financial Assistance Facility Agreement” with the euro zone, rather than the full bailout programme as euro zone governments led by Germany have insisted. Tsipras, who won power promising to ditch the bailout, is trying to secure funding without accepting all the demands for austerity and painful economic reform which are conditions of the EU/IMF programme.


One euro zone official said Germany wanted to make sure there is no rollback on Greek reforms.

Berlin can count on the support of north European fiscal hawks such as Finland and the Netherlands but also countries such as Spain and Portugal which have imposed austerity measures in return for aid and do not want Greece to get a softer deal.

But Greece also has sympathisers. Italian Economy Minister Pier Carlo Padoan warned of the risk involved in any Greek exit.

“We have to send a signal that the euro is irreversible,” he told the magazine l’Espresso. “If a country were to leave, it wouldn’t just mean one less country in the union but the transformation of the euro into a mechanism that can be undone.”

Credit ratings agency Standard & Poor’s said a Greek exit would be less financially risky for the remaining euro zone members than it would have been during the last scare in 2012. Since then, policymakers have introduced the European Stability Mechanism, which could help governments under market pressure if Greece were to leave, it noted.

In the letter seen by Reuters, Greece pledged to meet its financial obligations to all creditors, recognise the existing EU/IMF programme as the legally binding framework and refrain from unilateral action that would undermine the fiscal targets.

Crucially, it accepted that the extension would be monitored by the European Commission, European Central Bank and International Monetary Fund, a climbdown by Tsipras who had vowed to end cooperation with “troika” inspectors accused of inflicting deep economic and social damage on Greece.

However, the document stopped short of accepting that Greece should achieve this year a primary budget surplus, excluding debt service, equal to three percent of the country’s annual economic output, as promised under the bailout deal.

Tsipras wants to cut that to 1.5 percent to allow more state spending to ease the plight of the poor, while the document left the issue open by speaking of attaining “appropriate primary budget surpluses”.

The six-month interim period would be used to negotiate a long-term deal for recovery and growth incorporating further debt relief measures promised by the Eurogroup in 2012.

Crucial details remain to be clarified on the fiscal targets, labour market reforms, privatisations and other measures due to be implemented under the existing programme.

Greek stocks initially rose on Thursday’s developments, with the benchmark Athens stock index up 2 percent but it slipped back after the German statement, closing up just 1 percent on the day. Banks gained 9 percent but then shed much of this. (Additional reporting by George Georgiopoulos and Lefteris Papadimas in Athens, Jan Strupczewski in Brussels, Madeline Chambers and Noah Barkin in Berlin,; Writing by David Stamp and Deepa Babington; Editing by Paul Taylor, Peter Millership and Giles Elgood)