Greece's future in EU in doubt if talks fail, central bank warns

 Jun 17, 2015 2:59pm EDT Related: GREECE

ATHENS | BY GEORGE GEORGIOPOULOS AND MATTHIAS WILLIAMS

Reuters

The Greek central bank warned on Wednesday that the country risked a painful exit from the euro and ultimately even the European Union if Athens and its creditors do not strike a swift aid-for-reforms deal.

A top Greek negotiator told Reuters that Prime Minister Alexis Tsipras' leftist government was ready to make unspecified concessions but he once again ruled out any cuts to pensions - a major sticking point in the negotiations.

Germany, Europe's biggest economy, maintained its line that Greece had to make significant moves to break the stalemate.

Athens has until the end of June to find a way out of the impasse before it faces a 1.6 billion euro ($1.8 billion) repayment due to the International Monetary Fund, potentially leaving it bankrupt and teetering on the edge of the euro zone.

"It won't work without Greece moving significantly," German Foreign Minister Frank-Walter Steinmeier said in Berlin.

Greek negotiator Euclid Tsakalotos confirmed that Greece does not have the money to repay the IMF and said the government would only accept a deal that was sustainable and addressed debt, financing and investment - issues the European Union has said it does not want to open at this stage.

"If you have that, then the Greek government will sign the deal," Tsakalotos said. "If it doesn't have that kind of deal there is no point in signing onto something that you know is going to fail."

Hopes that a deal might be struck on Thursday at a meeting of European finance ministers looked increasingly remote.

"People are getting anxious on both sides. Athens expects Brussels to move. And Brussels expects Athens to move. And it's stuck," said a senior EU diplomat, who declined to be named.

"It's very dangerous, and we may have an accident."

Making clear the huge stakes at play, the Greek central bank said reaching an accord was "an historical imperative" that the country could not ignore.

"Failure to reach an agreement would ... mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country's exit from the euro area and, most likely, from the European Union," the Bank of Greece said in a monetary policy report.

In a sign that the European Central Bank was still standing by Greece, the ECB raised the ceiling on its emergency lifeline to the nation's stricken banks to 84.1 billion euros from 83 billion. The ECB has been raising the ceiling in small amounts and the substantial hike of more than 1 billion euros reflected the growing strains on the banks as depositors pull money out.

The Greek central bank has said the crisis prompted an outflow of deposits totaling about 30 billion euros from Greek lenders between October and April. The outflows are continuing.

RECESSION BOUND

Elected in January on a pledge to end years of grinding austerity, Tsipras wants his European partners to re-negotiate Greece's debt mountain, but they have ruled that out for now and instead want to see a fresh round of economic reforms, including pension cuts, to help the state balance its books.

"...If we don't have an honorable compromise and an economically viable solution, we will take the responsibility to say 'no' to the continuation of a catastrophic policy," Tsipras said after meeting Austrian Chancellor Werner Faymann.

Faymann, one of the European leaders most sympathetic to Athens, flew to Greece seeking a last-ditch deal.

"I can't see a solution lying before me, but I see that if we are convinced we want one, we have a good chance," he said.

Months of uncertainty have already taken their toll. After years of recession, Greece's economy finally started to grow again last year, but it fell back into negative growth in the first quarter of 2015 and Greece's central bank predicted the slowdown would accelerate in the second quarter.

Underlining the gulf in perceptions separating Greece and its creditors, a Greek parliamentary "Debt Truth Committee" set up in April to investigate the recent austerity imposed on the country concluded Athens was under no obligation to repay its debts. The findings of the report are not binding. "... Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from (past) arrangements is a direct infringement on the fundamental human rights of the residents of Greece," the report said. "Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious."

Some officials believe Thursday's meeting of euro zone finance ministers will be perhaps the last chance to stop Greece sliding into default and towards leaving the euro.

However the president of the so-called Eurogroup, Jeroen Dijsselbloem, said the chance of an accord was "very small".

EU officials have expressed frustration with what they see as Greece's failure to provide viable or detailed reform plans. The International Monetary Fund pulled its negotiators out of the talks last week citing the lack of any clear progress.

Highlighting the fraying tempers, German Chancellor Angela Merkel's Bavarian allies accused Athens on Wednesday of not grasping the seriousness of the situation, with CSU Secretary-General Andreas Scheuer calling Greek rulers "clowns".

The Greek central bank urged the European Union to spell out promises of debt relief to Greece - a key demand from Athens.

"An agreement would allow Greece to benefit from the favorable global environment and the ECB's quantitative easing program," the report said.

(Additional reporting by Renee Maltezou, Deepa Babington, Lefteris Papadimas, James Mackenzie in Athens, Alastair Macdonald in Brussels, Michael Nienaber in Berlin; Writing by Crispian Balmer; editing by Janet McBride)