Sunday 21 January 2018

Greece on 'painful course' to EU exit as countries prepare for Grexit

Greek PM Alexis Tsipras during a news conference with the Austrian Chancellor Werner Faymann in Athens
Greek PM Alexis Tsipras during a news conference with the Austrian Chancellor Werner Faymann in Athens

Isabelle Frasier

Greece's central bank has warned for the first time that the country could be on a "painful course" to default and exit from both the eurozone and the EU.

European countries are already preparing for a so-called Grexit.

The Central Bank warning comes as the Greek government and its international creditors blamed each other for failing to reach a deal over economic reforms. That failure is holding up the release of €7.2bn in bailout funds.

About €30bn was withdrawn from Greek bank deposits between October and April, the central bank added.

The central bank also warned the country's economic slowdown would accelerate without a deal.

"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 report.

Despite the warning, Greek shares rose 0.8pc in mid-morning trade on the Greek stock exchange.

The Athens benchmark index has fallen 11pc since last Friday, with bank shares worst affected.

Austrian Chancellor Werner Faymann was in Athens yesterday in a last-ditch bid to end the standoff.

"For Europe to be stronger, it must show solidarity and support to any country which needs it," he said during a meeting with Greek President Prokopis Pavlopoulos.

His comments followed a harsher critique from European Commission President Jean-Claude Juncker, who on Tuesday accused the Greek government of misleading voters, as Greek Prime Minister Alexis Tsipras accused the EU and International Monetary Fund (IMF) of trying to "humiliate" his country.

The Eurogroup council of eurozone finance ministers will discuss the issue further at its next meeting in Luxembourg today, as various options emerge on a deal or no deal:

Option 1, no deal: Greece defaults on IMF and ECB repayments; ECB pulls plug on emergency bank assistance leading to run on Greek banks, capital controls and potential Grexit.

Option 2: Greece agrees reform deal with creditors at last minute and avoids default, staying in euro.

Option 3: No deal reached but both sides paper over cracks and Greece stays in euro for now.

Greece has two weeks remaining to strike a deal with its creditors or face defaulting on an existing €1.6bn) loan repayment due to the IMF.

The country has already rolled a €300m payment into those due on 30 June.

Mr Juncker said the Greek government had not told the truth about its latest reform proposals.

"I am blaming the Greeks [for telling] things to the Greek public which are not consistent with what I've told the Greek prime minister," Mr Juncker said.

Mr Tsipras has said that the lenders wanted to raise VAT on electricity. Greece will not accept cuts to pension payments or public sector wages, saying two-thirds of pensioners are either below or near the poverty line.

Greece also complains creditors focus on increasing taxes instead of cracking down on tax evasion.

Other Greek ministers have criticised suggestions to increase sales tax on medicines. But Mr Juncker said: "I'm not in favour, and the prime minister knows that... of increasing VAT on medicaments and electricity. This would be a major mistake.

"The debate in Greece and outside Greece would be easier if the Greek government would tell exactly what the Commission... are really proposing," he added.

Greek finance Minister Yanis Varoufakis claimed EU proposals did include VAT increases: "Juncker either hadn't read the document he gave Tsipras - or he read it and forgot about it."

Elsewhere in the eurozone, Portugal's short-term borrowing costs rose sharply yesterday, with yields on six-month treasury bills jumping from minus 0.002pc to 0.044pc at the country's latest debt auction.

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