Greece, eurozone creditors gear up for clash over bailout

AP News
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Posted: Jan 28, 2015 2:38 PM
Greece, eurozone creditors gear up for clash over bailout

ATHENS, Greece (AP) — Greece's new radical left government has shot the first salvo in what is expected to be a tough clash with fellow eurozone countries over budget cuts that Athens says are choking the life out of its economy.

The government of Prime Minister Alexis Tsipras said Wednesday it would ignore key budget commitments, privatizations and reforms previous administrations had promised in exchange for rescue loans from fellow eurozone countries.

The hard line prompted a quick warning from the European Union and sent local investors into a panic on the prospect that the country might get cut off from its financial lifeline.

Shares on the Athens Stock Exchange tumbled more than 9 percent, with the country's four main banks losing over a quarter of their value.

Government bond yields spiked, particularly for short-dated debt, an indication investors are more worried about a default in the short term. The rate on 10-year bonds spiked to around 10.5 percent, while the 3-year yield hit 16.7 percent.

The Standard & Poor's credit rating agency warned it could downgrade Greece if talks with its creditors stall.

Tsipras' radical Syriza party won general elections over the weekend on a pledge to scrap the some austerity budget cuts, tax hikes and reforms that had been promised. The measures were meant to reduce debt, but had devastating side-effects for the economy, causing a years-long economic depression and spike in unemployment to over 25 percent. The party also wants to cancel billions of euros (dollars) in repayments, something eurozone creditor nations have ruled out.

Tsipras on Wednesday said the Greek economy was too weak to provide "crushing and unobtainable" budget surpluses demanded by the rescue lenders, which also includes the International Monetary Fund.

"Our first duty is to help those on the verge of despair — who do not have the basics like food, heating, and medical care," Tsipras said in a televised address at his inaugural cabinet meeting.

As Tsipras' ministers took up their positions Wednesday, they announced they were abandoning several commitments: the privatization of Greece's power utility, a refinery, the country's two biggest ports and several airports would be scrapped, and the minimum wage would be restored to pre-crisis levels.

Despite the rise in tensions over Greece's future under Tsipras, market turmoil has been largely confined to Greece. That's an indication investors think big financial trouble in Greece — such as a default — will not destabilize other eurozone countries. The currency bloc has in recent years built safeguards to reassure investors against the possibility the eurozone might break up.

For Greece, however, Wednesday's market rout is ominous.

"The first comments by the new government have prompted investors to think twice about whether they want to have their money in Greece right now," said Nick Malkoutzis, head analyst at MacroPolis, an Athens-based market and political review.

Should investors start pulling money out of the country, the financial system could become shaky.

Comments from Jyrki Katainen, the vice president of the European Union's executive Commission, suggested the negotiations are likely to be difficult.

"The commitments haven't changed and time is running out," he said. "We don't change our policy according to elections."

Greece's new energy minister gave an indication of the new political mindset in Athens, saying that the country's debt crisis isn't really a debt crisis.

"The debt is being used, unfortunately, by Europe's neocolonial powers to destroy and demolish everything in our country," Panayiotis Lafazanis said.

Negotiations could get under way as soon as Friday, when Jeroen Dijsselbloem, the Dutchman who chairs eurozone finance ministers' meetings, will visit Athens.

Among the most contentious issues will be Syriza's promise to Greeks to seek forgiveness of more than half of Greece's 240 billion euros ($272 billion) in rescue loans.

"Today we are turning the page on a toxic mistake that cost human lives, that were lost or undermined," said the new finance minister, Yanis Varoufakis. Greece's creditors, he argued, had thrown bailout money "into a black hole" of debt.

The Greek government has debt repayments coming in March so it needs to reach a deal with eurozone countries relatively quickly.

Varoufakis suggested the new government is open to reaching a temporary deal that might tie it over, until the two sides can reach a more definitive agreement.

On a day of symbolic gestures by the new government, riot barriers were removed from in front of parliament, and Varoufakis' first action as minister was to re-hire hundreds of cleaning workers fired by the previous government.

The cleaners camped out in protest in front of a government building for the past 18 months and became a symbol of defiance against economic austerity.

"Our happiness knows no bounds, we feel vindicated and so should much of Greek society — because thousands of people came by to encourage us during our tent protest here," fired cleaner Fotini Nikitara said.

"It was a strange feeling today, because we actually stood outside the (finance) ministry and the riot police didn't come to beat us up."

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Elena Becatoros in Athens and Raf Casert in Brussels contributed to this report.

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