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Talk of Greek Euro Exit Grows as Political Deadlock Continues

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More than a week after elections brought anti-austerity parties to the fore in Greece, efforts to form a coalition government remained deadlocked as first one, then another of the parties were unable to broker a compromise. Now the task is in the hands of President Karolos Papoulias, who thus far has been as unsuccessful as the party leaders themselves. The result could be a departure from the euro zone for the troubled country.

Bloomberg reported Monday that Papoulias was rebuffed by Syriza leader Alexis Tsipras, who on Sunday rejected Papoulias’ efforts to form a government and who has said he will not attend a meeting of party leaders called by the Greek president for late Monday.

Tsipras has said that he will not take part in a coalition government unless the leaders of Pasok and New Democracy, the other two biggest winners in the May 6 election, agree to abandon the latest austerity measures prescribed by the troika of the European Union (E.U.), European Central Bank (ECB) and International Monetary Fund (IMF) in exchange for a second bailout. In statements, Tsipras said, “Syriza won’t betray the Greek people,” and “We are being asked to agree to the destruction of Greek society.”

When it was Tsipras’s turn to try to form a government, he demanded that Pasok and New Democracy leaders abandon in writing their commitment to the conditions imposed by the troika. They refused.

Although last week Pasok and New Democracy reached agreement with a third, smaller, party, Democratic Left, to form a government that would last till 2014 and would keep Greece in the euro zone while renegotiating the bailout terms, the deal falls apart without Syriza and Tsipras. Democratic Left has said that in order for the agreement to succeed, Syriza must participate.

Tsipras is in favor of Greece remaining in the euro zone, but is firmly opposed to the bailout with its attached austerity, and has challenged the three parties to go ahead and try to govern without Syriza.

“The three parties that have agreed on the policy framework for a two-year government to implement the memorandum have 168 lawmakers in the new parliament,” Tsipras was quoted saying. Parliament has 300 lawmakers altogether. “They have the majority so let them proceed. Their demand for Syriza to join their planned agreement is illogical.”

So the push to form a government has been punted back to the Greek president. Should Papoulias be as unsuccessful as the party leaders have been, Greece will have no choice but to call new elections. That could result in an outright victory for Syriza, which has gained in the polls since Tsipras refused to compromise.

The notion of Greece remaining in the joint currency if it ditches its bailout terms is not a possibility, according to Finland’s European affairs minister, Alexander Stubb.

“I think that is an impossible equation and I think in that sense it is an irresponsible statement,” Stubb said Monday, according to Reuters. “We fully realize that the precondition for Greece staying in the euro zone is for it to fulfill the engagements that it has made to the IMF, to the European Central Bank and to the commission.”

Talk is also growing among European central bankers of the once unthought-of possibility of a Greek exit from the euro zone. The EC is holding firm on bailout terms, despite published reports to the contrary, according to Amadeu Altafaj, E.U. spokesman, who said in a statement, “I’m not aware of any discussions within the commission to grant new provisions, new concessions in the program.”

Officials are also downplaying the potential risk of a Greek exit, although the true outcome is of course unknown. No provision was made for a country to depart the currency bloc and the effects of an exit could be widespread. Despite that, the ECB officials Christian Noyer, Jens Weidmann, Patrick Honohan, Ewald Nowotny and Joerg Asmussen gathered on Monday to discuss the possibility.

“Whatever happens in Greece won’t be a problem for the French financial sector,” Noyer was quoted saying. “I don’t know a single group that will be placed in difficulty by an extreme scenario for Greece.”

Still, bond yields could surge if Greece fails to remain in the euro zone, spurring a default; capital flight and bank runs could also result, with the possibility that they could spread to other countries struggling with debt, such as Spain and Portugal. Greek bank shares had already lost up to 7% in early morning trading on Monday as the political deadlock continued, and markets and the euro were down across Europe.

Olli Rehn, E.U. economic and monetary commissioner, acknowledged that a Greek exit from the euro zone would result in some turbulence, although he also said that the euro zone is “certainly more resilient” to the possibility of a Greek departure from its currency than it was in 2008. when it would have been “massively underprepared.”

He continued, “I still believe that Greece can stay in the euro and find the way to make sure that it respects its commitments. 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.”