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A worker cleans the sign of the Bank of Greece from red and black paint, after Sunday's riots, in Athens, on Tuesday, Feb. 14, 2012. (Thanassis Stavrakis/Thanassis Stavrakis/AP)
A worker cleans the sign of the Bank of Greece from red and black paint, after Sunday's riots, in Athens, on Tuesday, Feb. 14, 2012. (Thanassis Stavrakis/Thanassis Stavrakis/AP)

Setback puts Greece and euro zone in danger Add to ...

The latest Greek financial rescue has hit another roadblock erected by exasperated European policy makers, who are demanding that Athens replace weak promises with firm commitments to impose harsh austerity cuts.

The delay comes as the shrinking Greek economy slides deeper into the hole, surpassing even the government’s gloomy forecast.

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Euro-zone finance ministers cancelled an emergency meeting set for Wednesday to approve the €130-billion bailout, because Athens had not satisfied all the conditions attached to it. These include further cuts the government will have to undertake to close a €325-million fiscal gap.

A bailout deal still remains tantalizingly close. But the setback is bound to ratchet up pressure on both Athens and its reluctant saviours as the clock ticks toward March 20, when the Greeks must come up with €14.5-billion to meet bond repayments. Without the rescue cash, the government faces financial collapse and a default that could put the future of the euro zone and its single currency at grave risk.

Earlier austerity measures have already taken a heavy toll on the economy, sharply reducing government revenues, boosting the jobless rate to record levels and deepening public anger. Greece’s GDP plunged 7 per cent on an annual basis in the fourth quarter from a year earlier, a faster pace than the 6.8 per cent decline for all of 2011.

Now, to meet European demands, policy makers will have to make even deeper cuts, prompting some analysts to suggest the real goal may be to drive Greece out of the euro zone.

“We want to do everything to help Greece master this crisis,” German Finance Minister Wolfgang Schauble said on German TV. But he pointedly added that “we’re better prepared than two years ago.”

The second bailout since 2010 “was from the beginning envisioned as the final resolution of the Greek crisis,” said Constantin Gurdgiev, a lecturer in finance at Trinity College in Dublin. “However, it is now patently and painfully clear to everyone involved that the Greek problem is not only of the legacy debts, but the structural insolvency of the entire Greek economy.”

Even after approval, the rescue package – in conjunction with about €100-billion in savings from a 70-per-cent “haircut” on debt held by banks and other private creditors – would take several weeks to complete, with the March 20 deadline looming.

“It has appeared that further technical work between Greece and the troika is needed in a number of areas,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of ministers overseeing the rescue.

Officials from the so-called troika – the European Commission, the European Central Bank and the International Monetary Fund – are policing Greece’s public expenditures. Their analysis of whether the planned budget cutbacks and bailout cash will be enough to stabilize government finances and enable Athens to meet debt-reduction targets was to have been ready for the finance ministers’ meeting.

Antonis Samaras, leader of Greece’s conservative New Democracy party and early favourite to win the next election in the spring, told party members to approve the budget cuts in a parliamentary vote on the weekend. But he angered the Europeans by signalling his intention to renegotiate the terms after voters replace the current caretaker government.

“I want to avoid jumping over the cliff today, to buy time, and to go to elections tomorrow,” he said.

Mr. Samaras at first refused to commit to the budget cuts in writing, a condition demanded of all the Greek party leaders by Brussels. But he is now expected to sign and deliver the necessary letter on Wednesday, clearing one more obstacle to the rescue.

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