Greece blows hot and cold in race to avert cash crunch

Tue May 5, 2015 3:33pm EDT Related: GREECE, IMF

ATHENS/BRUSSELS | BY LEFTERIS PAPADIMAS AND JAN STRUPCZEWSKI

(Reuters) - Greece blew hot and cold with its euro zone partners on Tuesday as it struggled to avert a potentially catastrophic funding crunch this month, when it must make a big debt repayment to the IMF as cash reserves dry up.

Finance Minister Yanis Varoufakis said after talks in Paris and Brussels that he expected euro zone finance ministers to acknowledge next Monday progress towards a cash-for-reform deal, opening the way to easing Athens' liquidity crisis.

"We are certainly going to have a fruitful discussion on May 11 that will confirm the great progress that has been achieved and will be yet another move, yet another step, in the direction of a final agreement," he told reporters after meeting European Economics Commissioner Pierre Moscovici.

Earlier, Moscovici had warned the euro zone would not even begin to discuss longer-term funding and ways to reduce Greece's debt until Athens had agreed a "consistent, detailed, complete" economic reform program with its creditors.

His comments appeared to slam the door on Greek hopes of bypassing an interim deal and moving directly to a comprehensive debt relief agreement by the end of June.

As a goodwill gesture, a senior privatization official said Athens was ready to finalize a 1.2 billion euro deal with German operator Fraport to run regional airports and to reopen bidding for a majority stake in the port of Piraeus.

Tuesday's diplomatic flurry came after leftist Prime Minister Alexis Tsipras spoke by telephone on Monday night to German Chancellor Angela Merkel, Europe's pre-eminent leader and Greece's chief creditor.

Intensive talks also continued with the International Monetary Fund, European Commission and European Central Bank on an interim deal but there was no sign of a breakthrough on key differences over pensions, labor reform and the minimum wage.

In a statement, a Greek government official said Athens had made "significant concessions" but that "serious disagreements between IMF and the EU" were blocking the negotiations and complained the two lenders had set contradictory "red lines".

"Against this background, there cannot be a compromise," the official said.

The statement appeared intended to shift the blame for slow progress in talks onto the lenders and show Greeks their government was taking steps to reach a deal. Recent polls have shown Greeks overwhelmingly want Tsipras to agree a compromise to avoid financial chaos.

LOOSENING STRANGLEHOLD

Deputy Prime Minister Yannis Dragasakis meanwhile met ECB President Mario Draghi in Frankfurt, a day before ECB policymakers hold their weekly review of emergency lending assistance (ELA) to Greek banks.

The ECB said in a statement that they reviewed Greece's economic situation and the state of negotiations in Brussels, but it gave no further details.

Athens wants the ECB to increase the liquidity lifeline and permit the banks to buy more short-term treasury bills, easing the government's immediate funding crunch. Greece has already commandeered cash reserves from municipalities and government bodies as it scrapes together funds to repay 970 million euros to the IMF by May 12.

But euro zone central bank sources say hardliners led by Germany's Bundesbank want the "haircut" on Greek securities offered as collateral for the funding to be increased following recent credit rating downgrades of Greece and its banks.

One such source said he did not expect the council to make a dramatic change that would put Greek banks in immediate difficulty while negotiations are continuing.

The political uncertainty was enough to prompt the European Commission to slash its forecast for 2015 Greek economic growth to 0.5 percent from 2.5 percent just three months ago and cut its estimate for the primary budget surplus before debt service.

A Financial Times report that the IMF's European chief Poul Thomsen had threatened to cut a funding lifeline to Greece unless its European partners agree to a debt write-off was denied by German Finance Minister Wolfgang Schaeuble.

"The IMF of course did not make such a comment," Schaeuble said, though Thomsen did say things "had become more difficult".

An IMF spokesman denied in a statement that the global lender had pushed for large-scale debt relief at the meeting of

euro zone finance ministers in Riga on April 24.

However, Thomsen had "pointed to the tradeoff that needs to be made" between Greece's slippage from fiscal targets agreed in 2012 and the additional financing and debt relief needed to make the country’s debt sustainable, he said.

The report had sparked a sell-off in Greek bonds and stocks while worries about Greece helped drive European shares lower.

While Germany and its allies have pointed to calm in bond markets to suggest that a Greek default or exit from the euro zone would not cause a wider financial meltdown, as it might have done in 2012, other EU countries are more concerned.

Moscovici stressed on Tuesday the Commission's goal was to keep Greece in the euro zone and avert what he called an "accident", while Italian Foreign Minister Paolo Gentiloni warned against belittling the risks of a possible "Grexit".

"Italy's government considers it short-sighted and dangerous to underestimate the Greek crisis," Gentiloni told reporters, adding that the idea of a Greek exit from the euro zone could not be taken lightly.

(Additional reporting by Philip Blenkinsop in Brussels, Karolina Tagaris and Deepa Babington in Athens, Elvira Pollina in Milan, John O'Donnell and Hugh Lawson in Frankfurt and Anna Yukhananov in Washington; Writing by Paul Taylor; Editing by Catherine Evans)