Greece plays down reading of Angela Merkel's financial meltdown remarks

Helena Smith in Athens

guardian.co.uk, Wednesday 25 January 2012 20.05 GMT

German chancellor has not given up hope on Greece's ability to be saved from economic collapse, says Athens

The German chancellor Angela Merkel's comments came ahead of talks resuming between Greece and its private creditors. Photograph: Fabrice Coffrini/AFP/Getty Images

Greece has played down comments by Angela Merkel which cast doubt on the debt-stricken country's ability to be saved from economic collapse, saying they had been "over-read" by the media.

Within hours of the German chancellor's remarks in a Guardian interview, Greek officials said there was no indication that Berlin had "given up hope" on Athens coming out of its worst economic crisis in modern times.

"We don't have any such indication of imminent failure," said a high-level source, speaking anonymously. "On the contrary they [the Germans] are working hard for success."

Ahead of a keynote speech at the World Economic Forum in Davos, Switzerland, Merkel said: "We haven't overcome the crisis yet. Of course, there's Greece, a special case where, despite all the efforts that have been made, neither the Greeks themselves nor the international community have yet managed to stabilise the situation."

But officials close to the interim Greek prime minister, Lucas Papademos, said: "I wouldn't take those words to mean that she has given up hope."

Papademos, a former vice-president of the European Central Bank, has been in regular contact with the German chancellor since taking over the reins of government in November.

Although discussions with the private sector over a bond swap deal – a precondition of Athens receiving further aid from its "troika" of creditors, the EU, ECB and IMF – were fraught, Greece was not about to be abandoned.

"What [Merkel] is simply saying is that we haven't, as yet, fully stabilised the fiscal situation which is something that no one would disagree with," said George Pagoulatos, an economics professor and one of Papademos's senior advisers.

"This is the precise purpose of a successful conclusion of the PSI [private sector involvement] discussions. Once they, and the loan agreement, are completed we will be standing on firmer ground and able to say that the situation has been stabilised."

The negotiations are set to resume (for the third time in as many weeks) on Thursday when Charles Dallara, who heads the Institute of International Finance (IIF), the global body representing private bondholders, returns to Athens.

Government officials said both sides were "very near" to a deal. The alternative – a Greek default that could have devastating repercussions for the eurozone and beyond – was not only "too awful" to contemplate but had concentrated minds.

"All sides understand the consequences of failure," said another official well-briefed on the negotiations. "A few decimal points on coupons are not going to derail the process. If necessary, minor concessions will be made," he added, referring to EU and IMF demands that private creditors accept lower interest rate on the new bonds.

But three years into the debt crisis, there is no doubt that anger is mounting within the EU and among the Greek public.

Fury over the tardiness with which Athens has applied economic and structural reforms has reached boiling point – not least in Berlin, which has bankrolled the €110bn package of rescue funds that Greece has received so far.

Clearly piqued by the foot-dragging, visiting debt inspectors have blamed the lack of progress on political posturing ahead of general elections in the spring.

With Greece missing fiscal targets, creditors have upped pressure on Papademos's three-party transitional government, demanding that wages be further slashed, bonuses be scrapped and employees sacked en masse from a bloated public sector.

The call for additional belt-tightening follows a wave of wage and pension cuts and tax rises. "They want to turn us into modern day slaves," said Stathis Anestis, at the confederation of Greek workers. "There will be such resistance, such rebellion that they will rub their eyes in disbelief."

To make the point, communist unionists with banners proclaiming "troika get out of Greece" blockaded the hotel where debt inspectors were staying on Wednesday in an attempt to stop the monitors sharing their "evil policies" with government officials.

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