05/14/2012 03:19 am ET Updated Jul 14, 2012

Greece Crisis: Parties Hit Political Stalemate, Euro Exit Fears Grow

By George Georgiopoulos and Karolina Tagaris

ATHENS, May 14 (Reuters) - Greek leftists rejected a last-ditch proposal by the head of state on Monday to put technocrats in charge of the country, as financial markets slid on speculation that political turmoil would force Athens out of the euro zone.

President Karolos Papoulias has summoned party leaders to hear his proposal on Tuesday. They agreed to attend but expressed little hope it would resolve a deadlock which has left Greece with no government to steer it away from bankruptcy, since an inconclusive parliamentary election eight days ago.

If Papoulias's proposal fails, he must call a new vote, which opinion polls suggest would be won by leftist opponents of a painful EU/IMF bailout. European leaders say that unless Greece fulfills its bailout commitments, they will cut off funding, which could push Greece out of the euro.

Disarray stems from the election on May 6 that left parliament split evenly between supporters and opponents of the 130 billion-euro ($168-billion) bailout deal. Neither side, each including several parties, has been able to form a government.

Papoulias will present his proposal to party leaders at 2 p.m. (1100 GMT) on Tuesday, but the bailout's most influential opponents - the radical leftist SYRIZA party which was a big winner in the election - said it saw it as just another way to foist on Greece a government that would implement the sharp cuts in spending and the tax increases demanded by the bailout plan.

"We will attend the meeting. But we are sticking to our position. We don't want to consent to any kind of bailout policies, even if they are implemented by non-political personalities," SYRIZA spokesman Panos Skourletis said.

"The fact that it's going to be implemented by non-political people doesn't change the purpose of this government, which is to implement the bailout."


Papoulias resolved a similar deadlock six months ago by naming technocratic former central bank governor Lucas Papademos as prime minister, a move that allowed the bailout negotiations to be concluded. But this time, the anti-bailout contingent in parliament is stronger and angrier.

The prospect that a new vote would bring SYRIZA and its allies to power - accompanied by open threats by European Union leaders to eject Greece from the euro if it abandons the bailout - sent European shares sliding and Spanish and Italian bond yields higher. Investors fear a Greek exit could make it harder for Madrid and Rome to persuade creditors to keep lending.

Socialist leader Evangelos Venizelos, whose party commanded a majority in the outgoing parliament but was reduced to third place behind SYRIZA in last week's electoral earthquake, backed Papoulias's proposal. But he doubted it would succeed.

"We support a government of personalities as an emergency solution," he said. "It's not normal to have a government by technocrats or personalities but when you are in such a crisis, in such a dead end, we have to accept this as well."

He added: "Things are very difficult. I'm not optimistic."

The leader of the moderate Democratic Left party, which has enough seats to offer the pro-bailout parties a majority but has refused to join a coalition that did not include SYRIZA, said he opposed the technocrat proposal as well.

"I told the president that a government by technocrats or personalities would suggest the failure of politics, and raised my objection," Fotis Kouvelis said.

With Greece set to run out of money as early as next month and no government in place to negotiate the next aid tranche, investors are now betting that a long-speculated Greek default and euro exit will happen sooner rather than later.

"There's a real risk for the market that at some point Greece will have to leave the euro if they don't find political cohesion," said ING strategist Alessandro Giansanti.

Emboldened by a reinforced financial firewall to protect weak euro zone states, and by an injection of cheap money to banks from the European Central Bank, EU leaders have broken a taboo by openly discussing the possibility of Greece leaving the euro zone, stressing it is a choice for Greeks to make.

"We wish Greece will remain in the euro and we hope Greece will remain in the euro ... but it must respect its commitments," European Commission spokeswoman Pia Ahrenkilde Hansen told a regular news briefing in Brussels, responding to a question she would have probably avoided just weeks ago.

"Greece has its future in its own hands and it is really up to Greece to see what the response should be."

German Chancellor Angela Merkel, leader of the continent's biggest and strongest economy, said it would be better for Greece to keep the euro and EU leaders should help it recover. But she added that such solidarity would cease in what she called the unlikely event of Athens reneging on agreements.


The prospect of national bankruptcy and a return to the drachma appeared to be slowly sinking in among Greeks, who must now choose between the pain of spending cuts demanded in return for aid and the prospect of even more hardship without the euro.

"We have to stay in the euro. I've lived the poverty of the drachma and don't want to go back. Never! God help us," said Maria Kampitsi, 70-year old pensioner, who was forced to shut her pharmacy two years ago due to the economic crisis.

"They must cooperate or we'll be destroyed," she said of the squabbling politicians. "It will be chaos."

Capturing the desperate mood, the Ta Nea daily ran a front-page image of a man in silhouette shooting himself in the head and red blood spattering behind to form a map of Greece.

"SYRIZA has paved the way for new elections. And this time, whether we like or not, they will be more like a referendum. We will have set ourselves the question whether we prefer the euro or the drachma," centre-left daily Ethnos wrote in an editorial.

Polls show the divided anti-bailout vote has consolidated this week around SYRIZA, now on course to place first in a new vote, a prize that brings a bonus of 50 extra seats in the 300-seat parliament at the expense of pro-bailout conservatives.

European leaders in recent days have reacted with growing disbelief to the rhetoric from the party's 37-year-old leader Alexis Tsipras, who has promised Greece can simultaneously renege on the terms of its bailout and stay in the euro zone.

"I think that is an impossible equation and I think in that sense it is an irresponsible statement," said Finland's Minister for European Affairs Alexander Stubb. German Finance Minister Wolfgang Schaeuble said Greece was in a "dreadfully difficult situation" but would pay a high price if it left the euro.