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Greece's membership in euro zone at risk again

A woman walks in front of a delivery truck with the euro symbol which reads 'Prices in free fall, so much more for your money' in Brussels on Monday, March 12, 2012.

Virginia Mayo/AP

Only weeks out of the woods after forcing creditors to take a massive hit on their bonds, Greece again finds itself at the brink.

The political turmoil in Athens threatens to sink its latest bailout and drive the insolvent country closer to a messy debt default, heightening the risk of an imminent exit from the euro zone.

The most likely outcome is another election in June and continued uncertainty in the markets. Greece faces a major bond repayment in the same month, and will be out of rescue cash by August if the group overseeing the bailout, known as the troika, pulls the plug.

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The unfolding chaos in Athens was a catalyst for a global selloff Tuesday. Equities and commodities plunged, the euro fell for a seventh consecutive day and U.S. Treasury bonds strengthened, thanks to their haven status with global investors. Greece's benchmark stock index fell to its lowest level in 20 years, although North American markets pared their losses later in the day.

In the wake of Sunday's splintered vote, Greece is now in political limbo, with the leaders of anti-austerity parties on both the left and the right hoping to translate their modest election success into real power.

The leader of a leftist party opposed to the onerous conditions of the financial rescue is now attempting to cobble together a ruling coalition that would immediately repudiate the deal with the troika of the European Union, European Central Bank and International Monetary Fund.

Alexis Tsipras, whose Syriza party came a surprising second in the election with 16.8 per cent of the vote and 52 seats in the 300-seat parliament, faces a formidable task and has only three days to form a government. He has already ruled out teaming up with the centre-right New Democracy or socialist Pasok, the two mainstream parties that led the previous coalition government, unless they renounce the bailout conditions they reluctantly accepted to keep the country solvent.

The gut-wrenching austerity, including massive public sector layoffs and slashed pensions in the midst of a crippling recession, led voters to angrily reject both parties. New Democracy still limped home first in the polls with 18.9 per cent of the vote. Pasok finished third with 13.2 per cent of the vote. New Democracy Leader Antonis Samaras quickly abandoned his own efforts to forge a coalition Monday.

Without one or the other on board, Mr. Tsipras, whose party itself is a coalition of small leftist groups, has little chance of forming a government, even if he includes the Communists (26 seats) and the ultra-right Golden Dawn (21 seats). He has already ruled out dealing with the latter.

"The timeline going forward requires Greece to pass a budget, including measures agreed to in its last bailout as a pre-condition for the first review that is supposed to occur by the end of this month," economists Derek Holt and Dov Zigler of Scotia Capital said in a report.

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"A medium-term fiscal plan is also supposed to be ready by the end of May. All of this is necessary in order to prove that financing is in place for the next year. At present, these timelines are unlikely to be met and especially so if another election is called on a coalition stalemate."

European officials made it clear that the terms are not open to renegotiation and that if Greece fails to stick to its austerity pledges, including another $15-billion (U.S.) in budget cuts due next month, its lifeline will indeed be cut. But it's more likely that the troika will keep enough money flowing to avert catastrophe until Greece sorts out its political mess.

"It must be clear to Greece that there is no alternative to the agreed restructuring program if it wants to remain a euro zone member," Jorg Asmussen, a German member of the European Central Bank's executive board, said bluntly. His comment to German newspaper Handelsblatt marks the first time a senior ECB policy maker has publicly raised the spectre of Greece being booted from the monetary union.

"Greece has had elections. We respect democracy and now it's important that Greece forms in due course a coalition government and respects the commitments it has undertaken with its European partners," said Olli Rehn, the EU's Economic and Monetary Commissioner.

The markets would prefer ignoring Greece entirely until the dust settles, but the risks to the euro zone remain stark if the crisis worsens.

"Greece will matter again, but only once troika payments are being delayed and the government is running out of cash, which could mean that exit and breakup discussions will heat up once again," said Beat Siegenthaler, senior foreign exchange strategist with UBS.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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