Euro exit fears grow as Greece hits stalemate

Tuesday 15 May 2012

EUROPEAN Union policymakers have warned Greece it could not remain in the eurozone if it ripped up its bailout programme as financial markets ratcheted up the pressure on the bloc.

deadlock: President Karolos Papoulias has failed to make headway.

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Renee Maltezou and Valentina Za ATHENS/ROME

Eight days after inconclusive elections, Greece's political parties have failed to form a coalition and opinion polls show anti-bailout parties would perform most strongly in a fresh vote which is likely next month.

Last-ditch talks led by President Karolos Papoulias yesterday looked unlikely to make headway after the leader of the radical leftist Syriza party said he would not attend and another left-wing leader refused to take part in any coalition without him.

Finland's European Affairs Minister said Greece could not remain in the eurozone if it tears up its bailout deal with the EU and the International Monetary Fund – the central demand of Syriza leader Alexis Tsipras. "I think that is an impossible equation and I think in that sense it is an irresponsible statement," Alexander Stubb said.With Greece due to run out of money as early as next month and no new government in place to negotiate the next aid instalment, investors have begun betting that a Greek default and euro exit will happen sooner rather than later.Talk of any member exiting the eurozone used to be a taboo for policymakers. Not any more.European Central Bank policymakers Luc Coene and Patrick Honohan have both openly voiced the possibility of Greece leaving the currency bloc and concluded it would not be fatal for the eurozone.However, there are powerful incentives for keeping Greece afloat, not least that the European Central Bank (ECB) and eurozone governments are major holders of Greek government debt.A hard default could leave them with heavy losses and if the ECB needed recapitalising as a result, that bill would also fall on its members' governments, with Germany first in line."We wish Greece will remain in the euro ... but it must respect its commitments," said European Commission spokeswoman Pia Ahrenkilde Hansen.The biggest fear for the eurozone is that chaos in Greece could drag Spain and Italy down and threaten the entire currency area's existence, a risk markets are beginning to price in."If Greece moves towards exiting the euro ... the EU would then need to enlarge its bailout funds and prepare other emergency measures," said Charles Grant, director of the Centre for European Reform think-tank in London."There's a real risk for the market that at some point Greece will have to leave the euro if they don't find political cohesion ... This will add to the contagion in the market and the countries that will suffer more are Spain and Italy," ING strategist Alessandro Giansanti said.Greek polls offer a glimmer of hope, showing a public overwhelmingly against more austerity but up to 80% in favour of remaining in the eurozone.If the mainstream parties, New Democracy and Pasok, could turn a fresh election into a referendum on euro membership and convince the public Syriza would provoke Greece's ejection, they could fare better than on May 6, when their combined vote was more than halved. "This time, whether we like or not, they will be more like a referendum. We will have set ourselves the question whether we prefer the euro or the drachma," centre-left daily Ethnos wrote in an editorial.

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Euro exit fears grow as Greece hits stalemate

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