ATHENS/BERLIN, (Reuters) – Attempts to form a government in Greece collapsed yesterday, jolting financial markets at the prospect that leftists opposed to the terms of an EU bailout could sweep to victory in a June election and tip the euro zone deeper into crisis.
The turmoil in Athens sent shock waves around other troubled members of the 17-nation European single currency area. The euro
slipped below $1.28, world stocks slid and Spanish and Italian bond yields rose above the danger level of 6 percent as investors scurried for shelter in safe haven German Bunds.
The tremors from Greece, compounding worries about Spain’s debt-laden banking system, ended any honeymoon for new French President Francois Hollande, thrusting the growing risks to the euro zone to the top of the agenda for his first ever meeting with German Chancellor Angela Merkel in Berlin the same evening.
The leaders of the Franco-German alliance that sits at the heart of the single currency project said after their talks that both wanted Greece to remain in the euro zone and were ready to work to promote ideas for economic growth that could help achieve that – though differences remain over what can be done.
After a meeting at which both stressed a commitment to the political ideal of the euro, despite coming from opposing sides of Europe’s left-right party divide, Hollande told a news conference: “I hope that we can say to the Greeks that Europe is ready to add measures to help growth and support economic activity so that there is a return to growth in Greece.”
“On growth, the method that we agreed is putting all ideas and all proposals on the table and seeing what legal means exist to put them into effect,” added the French leader, who landed in Berlin late after lightning struck his presidential jet.
Earlier, in his inaugural address, the Socialist president called for a European pact to revive growth and temper the conservative Merkel’s preference for Europe-wide austerity, seeking to change the direction of euro zone economic policy.
“I will propose to our partners a pact that will tie the necessary reduction of our public debt to the indispensable stimulation of our economies,” Hollande declared, saying Europe needed “projects, solidarity and growth”.
GREEK CRISIS
In Athens, President Karolos Papoulias abandoned efforts to broker a compromise on a cabinet of technocrats to steer the country away from bankruptcy, nine days after an inconclusive general election. A caretaker government will now be formed pending a new vote probably in mid-June.
“We resisted in every way,” said Alexis Tsipras, leader of the hard-left SYRIZA party, which surged to second place in last week’s election on an anti-austerity platform and blocked any deal with pro-bailout mainstream parties.
“We made the decision to not betray your hopes and your expectations,” said Tsipras, emboldened by opinion polls showing his party could top the poll in a second vote. “Now it’s time to complete it: We will consign to the dustbin of history all the spent forces of the past.”
Euro zone finance ministers dismissed talk of Greece leaving the single currency area as “propaganda and nonsense” on Monday. But with hostility to EU/IMF-imposed austerity rising in Greece, speculation about a possible state bankruptcy and euro exit is rattling financial markets and will not go away.
IMF chief Christine Lagarde said it was important to be technically prepared for the possibility of Greece leaving the euro zone, warning that such a move would be “quite messy” with risks to growth, trade and financial markets.
