Greece pins hopes on Merkel for compromise

London

GREECE'S left-wing Syriza coalition government is hoping that Chancellor Angela Merkel will persuade the German Parliament that a compromise is necessary. As The Business Times went to press on Friday night, negotiations on Greece's debt had reached a climax after Germany rejected a request from the Greek government to extend its bailout.

After two weeks of fractious negotiations with eurozone members, Syriza abandoned several election pledges. In an official letter, it asked the European Union for a borrowing extension of six months after Greece's bailout programme expires on Feb 28.

The European Commission welcomed the Greek request as a potential breakthrough, but Germany described the Greek proposals as a financial "Trojan Horse" as there were only vague promises to reform Greece's economy. Germany stated that it would not agree to a new loan if Greece did not carry out conditions of the present bailout programme.

"The letter from Athens is not a substantial proposal for a solution," said a spokesman for German Finance Minister Wolfgang Schauble. "It aims at bridge financing, without meeting the requirements of the (bailout) programme."

Germany's conditions for further aid to Greece include pledges not to reverse previously accepted reforms, to refrain from measures that would burden Greek public finances and to reimburse all its creditors.

European equity and bond markets were sanguine that a short-term finance deal would be reached to provide Greece's new government the opportunity to improve tax collection, counter corruption, encourage growth and reduce overall unemployment of 26 per cent and youth unemployment of 51 per cent.

According to a Merrill Lynch survey of fund managers in recent days, participants shrugged off the Greek crisis.

A net 81 per cent of regional specialists see the European economy strengthening in the next year. Against this background, a record net 51 per cent make the region their top pick in equities over a one-year horizon, up from January's net 18 per cent.

"The European debt crisis has taught us to expect an eleventh-hour deal every time and this is clearly seen in the lack of concern in the Eurostoxx index, the euro and peripheral bonds," said IG chief market strategist Chris Weston. "This does concern me, as there is always the chance that Greece backtracks or Germany walks away."

Indeed, market hopes may not be fulfilled even if there is a short-term financing solution in coming days. Greece is bankrupt, owing in total 342 billion euros (S$525 billion) including 63.5 billion euros to Germany alone, say sceptical economists. The chances of a Greek default and exit from the eurozone have thus increased.

"Greece is going to default. Its debt position is unsustainable," contends Roger Bootle, executive chairman of Capital Economics. "The key questions are: when will it default; and what will the default be called? "Even though canny market operators still suppose that a messy deal between Greece and the eurozone will be cobbled together, wise heads tell us to be prepared for a Greek exit from the euro."

If such an event occurs, there would be risks of contagion causing uncertainty and sales of Spanish, Portuguese and Italian bonds and equities. Podema, the left-wing Spanish political party, for example, has been holding large rallies, illustrating that the Spanish populace has also become disenchanted with stringent austerity demands from eurozone lenders.

READ MORE: Bondholders sanguine about Greece