Greece announces new polls as talks collapse

AFP - Debt-stricken Greece must hold fresh elections after talks on forming a new government broke up without agreement Tuesday, prolonging a tortuous crisis which could see Athens exit the troubled eurozone.

The new polls, expected on June 17, follow an inconclusive election on May 6 when a majority of Greeks voted against the austerity measures which Athens agreed to in return for a massive EU-IMF bailout late last year.

"We are going again towards elections, in a few days, under very bad conditions," socialist Pasok party leader Evangelos Venizelos said, regretting the fact that there was no accord.

"The Greek people must now make the right decisions for the good of the country," said Venizelos, who supported the rescue deal in a technocrat government formed last November.

A statement from President Carolos Papoulias's office read on state television noted simply that efforts to form a government had failed and that he would hold talks at 1000 GMT Wednesday with all political parties on setting up a caretaker administration.

With no guarantee that Greece's second elections in less than two months will produce a viable government, the prospects now are for prolonged volatility and uncertainty over its future and that of the wider eurozone.

International Monetary Fund head Christine Lagarde raised the possibility that Greece could leave the currency union.

"If the country's budgetary commitments are not honoured, there are appropriate revisions to do, which means either supplementary financing and additional time or mechanisms for an exit, which in this case must be an orderly exit," Lagarde said in an interview with France 24.

German Foreign Minister Guido Westerwelle said the collapse of the coalition negotiations was a "severe setback for the urgently needed confidence in Greece's readiness to reform".

Papoulias had called Tuesday's meeting after talks Monday with the conservative New Democracy, Pasok and radical Democratic Left parties failed to reach an accord on a coalition government.

He had suggested that in the absence of any other solution, a government of "distinguished and non-political figures" should be considered to break the impasse over the EU-IMF austerity measures.

Success would have seen a return to the technocrat solution of November when former central banker Lucas Papademos, supported by New Democracy and Pasok, pushed through the 240 billion euro ($310 billion) EU-IMF bailout which staved off Greek bankrupcty.

It would also likely have helped ease strains over Greece's future in the 17-member eurozone but now everything is up in the air again while the economy remains mired in recession for a fifth year.

Figures issued Tuesday showed the Greek economy slumped a massive 6.2 percent in the first quarter compared with a year earlier, driving anger with the austerity policy and reforms.

The response to the talks breakdown on the financial markets was immediate, with European stocks turning lower and the euro slumping below $1.28.

"Investors are pricing in a Greek exit from monetary union with a risk that it could turn out to be disorderly," said VTB Capital analyst Neil MacKinnon.

Mike McCudden at Interactive Investor said Greece posed a problem of contagion for other weaker eurozone members, namely Spain and Italy, as Europe sees "a general backlash against austerity measures".

The onus is now on new French President Francois Hollande and German Chancellor Angela Merkel, who "have around 24 hours to announce a plan which will offer some hope to the markets," McCudden argued.

German has repeatedly insisted there can be no easing of the Greek bailout terms but Hollande won office on a pledge to focus on growth, not austerity.

There can be little doubt about the gravity of the situation both for Greece, if it has to leave the eurozone, and for its partners, who might lose billions in a disorderly withdrawal from the bloc.

France would face a bill of 50 billion euros if Greece were forced to quit, its outgoing Finance Minister Francois Baroin warned.

Charles Dallara, who as head of the Institute of International Finance helped negotiate a private creditor debt write-down for Greece, warned that the cost of failure would be too high to bear.

"I believe that the cost to Greece, the cost to Europe and the cost to the entire global economy may still be enough to cause Greek politicians and European politicians to pause before they pull the trigger on a Greek exit."