European bankers caution Greece over euro zone exit


European bankers today warned Greece of the consequences of leaving the euro as Greek president Karolos Papoulias called the country's leaders to a meeting tomorrow in a last-ditch bid to forge a unity government.

Greece's political landscape is in disarray after voters humiliated the only parties backing a rescue plan tied to spending cuts, leaving no bloc with sufficient seats to form a government to secure the next tranche of financial aid.

Without aid from the EU and IMF, the country risks bankruptcy in weeks and - as European leaders now openly acknowledge - potential ejection from the euro zone.

Greece will not receive any more financial aid if it does not stick to the agreed bailout deal, European Central Bank policymaker and head of Germany's Bundesbank Jens Weidmann was quoted as saying today.

He also told Sueddeutsche Zeitung in an interview an exit from the euro zone would have a bigger impact on Greece than on the rest of the bloc."For Greece the consequences would be much more grave than for the rest of the euro zone," he said. "I think it is too simple to think Greece's problems would be solved by leaving the euro area.

"If Athens does not stand by its word, then that's a democratic decision. The result is that there is no more basis for further financial aid," Weidmann said, echoing similar comments from German foreign minister Guido Westerwelle."

Europe is "certainly more resilient" to a possible Greek exit than it was two years ago, when the bloc would have been "massively underprepared," European Union Economic and Monetary commissioner Olli Rehn said at a conference in the Estonian capital of Tallinn today.

"I still believe that Greece can stay in the euro and find the way to make sure that it respects its commitments," Mr Rehn said. "It would be much worse for Greece and Greek citizens, especially for the less well-off Greek citizens, if Greece did leave the euro than for Europe as such. Europe also would suffer, but Greece would suffer more."

Speaking at the same event, Irish Central Bank governor Patrick Honohan said a Greek exit would damage confidence in the euro zone but need not be fatal.

"Technically, it can be managed. It would be a knock to the confidence for the euro area as a whole. So it would add to the complexity of the operation until things settle down again. It is not necessarily fatal, but it is not attractive," he said.

A departure by Greece would be "a rather destabilising kind of event" for the rest of the euro area, and all sides are working to try to avoid it, he told his audience.

This morning, Socialist leader Evangelos Venizelos met the Greek president in the presidential mansion to formally confirm he had been unable to persuade other parties to form a broad coalition that would keep the bailout agreement but try to improve its terms.

The holdout was Alexis Tsipras (37), a charismatic radical leftist, who has emerged as the standard bearer for opponents of the bailout's harsh austerity measures and has the most to gain from a new election.

Mr Papoulias has one last chance to press all political leaders to form a coalition. If he fails, he must call a new election in June. In televised remarks during their meeting, Mr Venizelos urged the president to lean on Mr Tsipras to join an "ecumenical government".

"I put this forth to Mr Tsipras. I haven't received a positive response," Mr Venizelos said. "I believe that is where your efforts should be focused during the consultations."

The president replied: "There are signs of optimism in what you are telling me and I hope I can contribute to the formation of a government - because things are rather difficult.

"Papoulias will meet the leaders of the country's three biggest parties tomorrow morning, his office said. He will then hold individual meetings with the leaders of the smaller parties.

The lurch towards a new election has caused havoc in financial markets, both in Greece and across Europe, where the prospect of Athens leaving the euro is viewed as a risk for bank balance sheets and the credit ratings of other vulnerable countries, although the EU is better prepared than it was a few months ago.

Mr Tsipras says the bailout deal must be torn up, though like most Greeks he says he wants to keep the euro, a position seen in Brussels as untenable without the bailout.

Last Sunday's election saw voters punish the two parties that dominated the country for generations - Mr Venizelos's Pasok and the conservative New Democracy party of Antonis Samaras. The two, which usually account for around 80 per cent of votes, saw their combined tally collapse to just 32 per cent.

The rest of the votes were cast for small parties that oppose the bailout, ranging from the Communists to the far right. Polls conducted since then show the anti-bailout vote consolidating around Mr Tsipras, whose good looks and self confident manner have helped make him a hero for young people.

Mr Venizelos and Mr Samaras say that without their bailout deal Greece would be headed for certain ejection from the euro and bankruptcy. If a second election does take place, they will be hoping that frightened voters return to the traditional parties.

The European Union/International Monetary Fund bailout requires Greece to cut wages, raise taxes, fire state employees, sell off state assets and reform labour laws. EU leaders say it is needed if Athens is ever to become solvent.

But opponents say the harsh medicine is self-defeating, making it impossible for Greece to grow its economy and emerge from the depths of the euro zone's worst recession, which has ground on for five years.