By Ambrose Evans-Pritchard Monday 09 February 2015
Germany’s vice-chancellor said "zero chances" that his country will respond to Greek demand for Nazi war reparations
Alexis Tsipras, the new Greek premier, has been given a string of warnings to tone down his rhetoric Photo: AFP
Europe’s creditor powers have reacted with fury as Greece presses ahead with plans to smash its EU-IMF Troika programme and demand war reparations for Nazi occupation, raising the risk of a traumatic rupture with Athens by the end of the month.
Wolfgang Schauble, Germany’s finance minister, said there could be no bridging agreement for the radical Syriza government, insisting that it must stick rigidly to the terms of Greece’s €245bn bail-out package and secure a negotiated extension, or face the consequences. “If they want to deal with us, they need a programme,” he said.
He issued a clear warning to the new Greek premier Alexis Tsipras that his country will be left penniless in a hostile world. “I don’t know how financial markets will handle it, but maybe he knows better,” he said.
Jean-Claude Juncker, the European Commission’s chief, urged Syriza not to trifle with the EU or to overplay its hand after winning a landslide mandate last month to end austerity. “Greece shouldn’t assume that the overall mood in Europe has changed,” he said.
The EU authorities have told Mr Tsipras that a series of crucial meetings in Brussels this week are his last chance to retreat from hot campaign rhetoric and agree to an extension of the Troika bail-out.
The clear threat is that the European Central Bank will cut off €60bn of emergency liquidity support for the Greek financial system when the existing Troika arrangement expires on February 28. This would force Greece to impose capital controls, nationalize the banks, and reintroduce the drachma within days.
Even if the ECB agrees to a stay of execution, Athens will start to run out of money in March, when it faces repayments to the International Monetary Fund, followed by other creditors. Tax revenues have dried up over recent weeks as Greeks wait to see what Syriza does in office. The treasury’s cash reserves have fallen to €1.5bn.
Fears of an imminent collision set off fresh alarm in Greek markets on Monday. The yield on three-year Greek bonds jumped over 300 basis points to 21pc, while bank stocks fell 9pc.
Greek lenders are under serious stress. The ECB’s shock decision last week to stop letting them use Greek bonds and Greek-guaranteed debt as collateral for loans has forced them to take on emergency liquidity that is more costly. It also imposes greater “haircuts”, effectively contracting of credit.
This comes at time when non-performing loans are already the highest in the world at over 40pc and still rising. Greek property prices fell a further 5pc in the fourth quarter of 2014, pushing large numbers of mortgage holders yet deeper into negative equity. Data released today showed that Greece’s industrial output fell 3.8pc in December.
Europe’s leaders were stunned by the aggressive tone of Mr Tsipras’s address to the Greek parliament on Sunday night. They had assumed that Syriza would hold out an olive branch once it was safely in office, shifting its stance in time-honoured EU fashion.
Instead Mr Tsipras vowed to implement the party’s radical Thessaloniki Programme in its “entirety”, including a demand for €11bn of war reparations from Germany, a move deemed deeply offensive in Berlin.
Sigmar Garbriel, Germany’s vice-chancellor and Social Democrat leader, said "the chances are zero" that his country will respond to such an extraordinary demarche. The German press decried Greece's use of the “Nazi card” as moral blackmail.
Mr Tsipras not only refused to renew the Troika bail-out – saying this would be an “extension of mistakes and disaster” – he also insisted on rolling back a clutch of EU-imposed reforms. His list includes an end to the privatisation of utilities, a return of collective bargaining, a halt to rises in the pension age, an increase in the minimum wage to €751 a month, the cancellation of a key property tax, and the rehiring of 10,000 public workers, among other measures.
Almost as he was speaking, Italy’s RAI television broadcast an interview with Greece’s finance minister Yanis Varoukais in which he likened the "cloud of fear" in Europe to the Soviet Union in its final agonies, and made it clear that Syriza intends to push Europe to the brink.
“Exit from the euro does not even enter into our plans, quite simply because we think the euro is fragile. It is like a house of cards. If you pull out the Greek card, they all come down,” he said.
“Do we really want Europe to break apart? Anybody who is tempted to think it possible to amputate Greece strategically from Europe should be very careful. It is very dangerous. Who would be hit after us? Portugal?”
“There are Italian officials – I won’t say from which institution - who have approached me to say they support us, but they can’t say the truth because Italy is at risk of bankruptcy and they fear the consequence from Germany,” he said.
While the bare-knuckled negotiating tactics are causing outrage, leading economists around the world doubt that a Greek exit could easily be contained. It would be “Lehman squared” warned Berkeley professor Barry Eichengreen.
Crude realpolitik suggests that Greece may not be as isolated as widely-presumed. American President Barack Obama told German Chancellor Angela Merkel in Washington that he expects Europe and the IMF to “work with the new Greek government to find a way that returns Greece to sustainable growth within the Eurozone."
In a clear sign that Washington is losing patience with the Eurozone's strategy of fiscal contraction, Mr Obama almost seemed to endorse Greece’s demands for a radical shift in policy. “You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits,” he said last week.
The worry is that Greece will spin out of control, either becoming another crisis state across the arc of instability from Ukraine through the Levant to North Africa, or turning its back on NATO and throwing in its lot with Russia.
Austria’s Chancellor Werner Fayman appears to share the concerns about contagious instability in the Balkans, still a simmering hotbed of national tensions and contested borders. “We must save Greece and Europe from a Grexit outcome,” he said.
Mr Faymann said there is much more at stake than the technical and trivial details of the bail-out. If the loan terms have to be changed - he said - so be it.