Greece threatens tilt to Russia and China unless Europe yields

By Ambrose Evans-Pritchard, International Business Editor 10 February 2015

“We have other ways of finding money. It could be the United States, it could be Russia, it could be China" said the Greek defence minister

The implicit threat to team up with Russia comes up at an extremely delicate moment as French and German leaders attempt to negotiate a peace deal with President Vladimir Putin, and Washington mulls military aid for Ukraine Photo: Alamy

Greece's radical new government has threatened to seek money from Russia and China to avert a financial crisis rather than yield to austerity demands from Europe, risking a dangerous political rift with the leading EU powers and a full-blown NATO crisis.

"We want a deal. But if there is no deal, and if we see that Germany remains rigid and wants to blow Europe apart, then we will have to go to Plan B,” said Panos Kammenos, the defence minister and head of the Independent Greeks party in the ruling coalition.

“We have other ways of finding money. It could be the United States at best, it could be Russia, it could be China or other countries,” he told Greek television. Mr Kammenos said Greece would prefer to leave the euro if membership means submitting to what he calls a “Europe under German domination.”

The implicit threat to team up with Russia comes up at an extremely delicate moment as French and German leaders attempt to negotiate a peace deal with President Vladimir Putin, and Washington mulls military aid for Ukraine.

Nikos Chountis, Greece's deputy foreign minister, said on Tuesday that Russia and China had already offered financial support to the country. "There have been proposals, offers I would say, from Russia, recently after the election, for economic support as well as from China, regarding help, investment possibilities," he said.

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"We have not asked for it. It's on the table. We're discussing it," he added, stressing that the first priority was to "exhaust all options" in reaching a deal with the Eurozone.

Cyprus has already caused a political storm by offering to expand Russian access to its ports and airfields – including “military facilities” - though it has stopped short of offering full military bases.

Mr Kammenos is a Greek nationalist with long-standing links to Moscow and Beijing. Sources close to the left-wing Syriza government said finance minister Yanis Varoufakis has no such “Plan B” in his pocket since the government is confident that Greece’s new four-point plan presented to Brussels this week will prove the basis for a deal.

Yanis Varoufakis is Greece's finance minister

The Greek proposals will be presented to EMU finance ministers at a key session of the Eurogroup on Wednesday. They are essentially a restatement of Syriza’s long-standing demands, with an added request for some fresh money from EU creditors to tide the country over until September.

It is far from clear whether Russia would be able to help Greece, given its own economic crisis at home and fast-depleting foreign reserves. It offered comforting words but little else to Cyprus two years ago, even before the crash in oil prices forced the Kremlin to tighten its belt.

While the Chinese have ample foreign reserves, they tread with great caution abroad. “Everybody has been waiting for China to rescue Europe for years but it never happens. There is no Chinese white knight,” said Ashoka Mody, a former IMF bail-out chief in Europe.

Greek bond markets surged on Tuesday and the Athens bourse rose 8pc on hopes that the new debt plan in Brussels will pave the way for a deal, averting a cut-off on February 28 that could leave the Greek financial system without a liquidity lifeline from the European Central Bank and force Greece out of the euro. Bank stocks spiked 20pc.

Germany’s finance minister Wolfgang Schauble later deflated the false optimism sweeping markets, denying reports that the European Commission had offered Greece a six-month life-line. “It must be false: firstly because I don’t know about it, and secondly because the Commission is not responsible for this,” he said.

Confusion reigned in Athens as rumours came and went. The share price for the Piraeus Port Authority jumped 17pc on reports that the government would proceed with the next phase of privatisation after all, only to fall back when the claims were denied.

Analysts said is hard to see how the Eurogroup can accept the new Greek package. Athens wants a cut in the target for Greece’s primary budget surplus to 1.5pc of GDP over the next two years, instead of the current target of 3pc in 2015 and 4.5pc in 2016 imposed by the EU-IMF Troika. This would avert further fiscal tightening and allow Syriza to carry out plans to boost welfare spending.

“This cannot be the basis of a deal,” said Dimitris Drakopoulos from Nomura. “Syriza can’t just cut the primary surplus out of the blue without giving anything in return”.

Mr Varoufakis will propose a debt swap to replace €195bn of loans from EMU governments and rescue funds. These will be so-called `Bisque Bonds’ that link payment to GDP growth, and therefore entail large potential losses for EMU creditors if growth falters.

The scheme amounts to debt relief but averts a formal write-off. This means that Chancellor Angela Merkel and other leaders would not have recognize losses in a line-item budget presented to their national parliaments. It spares them a political storm at home.

Officials at Lazard in Paris – contracted by the Greeks to thrash out a debt plan – said €100bn must be shaved off Greece’s €315bn external debt to restore the country to long-term viability, and to allay the grave macro-economic errors made by the Troika.

Mr Varoufakis hopes to sweeten the bitter pill for Europe by agreeing to keep 70pc of the Troika reforms, deemed the “good” ones. The other 30pc will be scrapped and replaced by ten new reforms in cooperation with the OECD. These will purportedly go further in shaking up the Greek state and breaking the cartel nexus of the old dynasties. Yet he has not yet revealed which reforms will be kept.

Simon Tilford, from the Centre for European Reform, said Syriza is needlessly making enemies with its scattershot rhetoric and wild talk of Nazi war reparations, but is right in its fundamental critique of Europe’s debt-deflation errors.

“What the Greeks are saying makes a lot of sense and has the support of economists across the world. The real problem is Germany. They seem impervious to evidence and are intellectually isolated. What is shocking is how insular the German debate has become,” he said.

“Germany’s leaders have created a rod for their own backs by failing to explain honestly to their own people what the origins of the Eurozone crisis really were. That is why it is going to be so difficult to reach a deal,” he said.

Greece threatens tilt to Russia and China unless Europe yields - Telegraph