Fears for eurozone heighten as Greek deadline looms

Tensions increased across the eurozone and globally as negotiations on Greek debt and cutbacks reached a critical point, amid fears that the country could default.

Eurozone finance ministers are on standby for a teleconference tomorrow or Thursday while Lucas Papademos, the Greek prime minister, held critical meetings with the troika and is due to resume talks with the leaders of the main political parties today.

Athens received repeated warnings from the European Commission, France and Germany again yesterday that they must adhere to the terms of the new €130 billion package before any of it will be released.

They need the money to pay €14.4bn in debt which falls due on Mar 20, but in the meantime must conclude a deal with the private sector on a 50% haircut which could take up to six weeks to put in place.

Pointing up the seriousness of the situation, Greek European Commissioner Maria Damanaki said that plans were being studied in the Commission to deal with her country defaulting or leaving the euro.

News from Athens suggested politicians were close to agreeing savings of 1.5% of GDP, or €3bn this year demanded by the troika. It will include a 20% cut in the minimum wage, cuts to public sector pension benefits and laying off some 15,000 civil servants this year and more in the following years.

There are a whole range of events in train that need to be completed quickly. As well as fulfilling the conditions for the new money, negotiations with the bankers on the terms of the 50% haircut need to be completed.

It is essential that Greece can show its debt will be no more than 120% by 2020 to ensure the IMF’s continuing participation in the bailout. However the savings from the cuts in Athens, together with the private sector involvement, may not be sufficient to achieve this.

In that event the issue of public sector involvement will need to be considered. The ECB, which is holding about €40bn of Greek bonds, is fighting against taking a cut, although this may be in the form of reduced profits when the bonds reach maturity. The EU ad-hoc fund that provided the first bailout of €110bn could also take a hit.

German Chancellor Angela Merkel, in Paris for the annual joint cabinet meeting of the main ministers from the French and German governments, warned: “There can be no new Greek programme if agreement is not reached with the troika... we will not deviate from this position”.

French President Nicolas Sarkozy told their joint press conference: “Time is running out, it needs to be concluded, it needs to be signed”.

Ms Merkel insisted that they did not want Greece to default: “We refuse to [accept] a Greek bankruptcy. We cannot accept that,” she told German TV.

Mr Papademos is expected to meet the leaders of the three parties that make up the coalition government today to get their unequivocal support for the cuts. This is proving difficult in view of elections expected in April. A general strike called for today will not make it any easier.

Ms Merkel increased the pressure, not just by pushing for agreement on the new cuts, but also pursuing her plan to put Greece’s finances under a form of direct EU supervision.

Before last week’s summit, Berlin floated a paper suggesting that all Greek state revenues would be taken in charge and be used to repay debts before using the remainder to run the country.

Although she did not push this proposal at the summit, she followed through on it in Paris yesterday, saying that the Greek bailout fund should be put in a special account to make sure its channelled to service the country’s debts of more than €350bn.