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On brink, Greeks, creditors hopeful

by PAN PYLAS and LORNE COOK The Associated Press | February 18, 2015 at 2:37 a.m.

BRUSSELS -- Despite all the tough talk and ultimatums, Greece and its creditors in the 19-country eurozone are still expected to cobble together a deal that will allow the country to remain a member of the euro currency.

Investors and European policymakers are not panicking despite a breakdown in talks between the two sides over the new Greek government's attempt to renegotiate its financial bailout.

That's likely because they've been here before -- the eurozone has in recent years often run into moments of brinkmanship, often with Greece. Each time, a deal was clinched eventually.

Both sides want to avoid the worst-case scenario in which Greece is cut off from aid and has to leave the euro. That would devastate Greece's economy and rock European and global financial markets.

"If Greece were to leave the euro, the financial chaos that would follow could also spell the end of the Syriza-led government," said Jane Foley, analyst at Rabobank International, referring to the radical party that won elections last month. "For this reason, it remains our central view that an eleventh-hour compromise between Greece and its creditors is still likely."

They're on borrowed time, though. Greece's European bailout program ends at the end of this month, and the longer a deal is not found, the more jittery markets are likely to get.

While the stock index in Athens declined modestly Tuesday, Greece's government borrowing rates are rising steadily, a sign investors are more wary of a potential bankruptcy.

No one is discounting the possibility that Greece might fail to agree on a deal with its creditors, a development that could have big and unforeseen consequences for Europe and the global economy.

The latest tension centers on the eurozone's ultimatum to Greece to ask for an extension to its bailout program by Friday before further negotiations on the country's future financing can take place.

Greece's left-wing Syriza government made scrapping the bailout program a cornerstone of its recent triumphant election campaign. In return for billions of dollars in rescue money that Greece has been getting since 2010, successive governments have had to implement budget austerity measures such as deep cuts to spending and pensions.

Syriza, in power for barely three weeks, blames those measures for the country's economic ills. The Greek economy has suffered through a depression, and unemployment and poverty have swelled.

"It would be an act of subterfuge to promise to our partners to complete successfully a program we challenged the logic of," Greek Finance Minister Yanis Varoufakis said.

Jeroen Dijsselbloem, a top official in the eurozone who issued the ultimatum, is hopeful that the Greek government will agree to extend its current program, and as an encouragement he laid out the prospect of an immediate renegotiation of some of its terms.

A deal could depend on something as simple as what to call such an extension.

The Greeks do not want any deal that suggests the current program is being kept alive. Instead, they want a "bridging program."

Whatever it's named, both sides want the country to get a few months' worth of loans to buy time for more thorough talks. If they can agree on a way to describe such a deal in a way that saves face for both sides, a deal would be a lot closer, analysts say.

Varoufakis was hopeful.

"We are ready and willing to do whatever it takes to reach an agreement over the next two days," he said late Monday.

Among the main reasons experts still expect a deal is that failure would cost both sides dearly.

Economists at Commerzbank estimate that falling out of the currency union would see Greece's economy shrink another 10 percent. That's on top of the 25 percent it already has plunged since the crisis, putting it through a downturn similar to the U.S. Depression of the 1930s.

A new currency would fall sharply in value, meaning higher prices for imports such as medicine and gas. Companies' debts in euros would swell, forcing many into bankruptcy.

In the rest of the eurozone, taxpayers would be handed big losses on bailout loans their governments gave Greece.

Information for this article was contributed by David McHugh, Geir Moulson and Elena Becatoros of The Associated Press.

Business on 02/18/2015

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