February 9, 2015 / 12:52 PM / 2 years ago

REFILE-WRAPUP 1-EU warns Greece: don't assume euro zone will accept your demands

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By Holger Hansen and Lefteris Papadimas

NAUEN, Germany/ATHENS, Feb 9 (Reuters) - The European Union's chief executive warned Greeks on Monday not to expect the euro zone to bow to leftist Prime Minister Alexis Tsipras' demands in a growing confrontation over Athens' debt crisis.

Tsipras laid out plans on Sunday to dismantle Greece's "cruel" austerity programme, ruled out any extension of its 240 billion euro international bailout, which runs out at the end of this month, and vowed to seek reparations from Germany for World War Two.

His uncompromising maiden policy speech to parliament spooked European financial markets and partners outside the euro area. British Prime Minister David Cameron chaired a special meeting with finance ministry and Bank of England officials on Monday to plan for a possible Greek exit from the euro zone, a Treasury source said.

Ahead of a meeting of G20 finance ministers in Istanbul, the United States and Canada urged the EU and Greece to tone down the rhetoric over austerity and work for a compromise on the debt issue.

Greek Finance Minister Yanis Varoufakis, who found scant support on a tour of European capitals last week for his plans to restructure Greece's debt, angered some euro zone partners by saying on Sunday the 19-nation single currency area would ultimately collapse if Greece were forced out.

European Commission President Jean-Claude Juncker told reporters on a visit to Germany: "Greece should not assume that the overall mood has so changed that the euro zone will adopt Tsipras's government programme unconditionally."

The head of the EU's executive arm, who met the Greek leader in Brussels last week, said he did not expect a deal on the way forward with Greece at an EU summit on Thursday or a finance ministers' meeting of the euro zone on Wednesday.

"I don't think we'll reach final conclusions so soon," Juncker said at a meeting of Germany's Social Democratic Party (SPD) in Nauen, near Berlin.

No Reparations

German Vice-Chancellor and SPD leader Sigmar Gabriel, attending the same event, rebuffed Tsipras' call for reparations over the Nazi occupation of Greece, saying such matters had been finally dealt with in the negotiations that led to German unification in 1990.

Asked whether Berlin would pay compensation, Gabriel said: "The probability is zero."

Greek financial markets sank further on Monday, pulling European shares down, after credit ratings agency Standard & Poor's cut Athens' rating last Friday. The index of Greek banking stocks fell almost 10 percent to near record lows.

Government bond yields rose by up to 3.7 percentage points, with three-year yields nearing 22 percent. The soaring rates mean Greece is shut out of capital markets.

EU officials had hoped that Tsipras would take account of the messages he heard from French, Italian and EU leaders last week and tone down his policy programme to make a compromise with euro zone partners possible.

Instead, the 40-year-old prime minister stuck to his guns, rattling off a list of moves to reverse reforms imposed by EU and International Monetary Fund lenders, from reinstating pension bonuses and cancelling a property tax to ending mass layoffs and raising the minimum wage to pre-crisis levels.

Juncker said Tsipras had taken "only limited account" of EU suggestions on the way forward in the debt crisis. Brussels has been pressing Athens to request an extension of the bailout programme for a few months to allow time for negotiations on easing the debt burden in exchange for economic reforms.

Instead, the Greek leader flatly ruled out any extension and seemed to court confrontation with Germany, the euro zone's main paymaster, by raising the reparations issue.

A senior euro zone official said the two sides were not much closer to a solution. There appeared to be "a very dogmatic attitude in Athens", fuelled by Varoufakis' incendiary interview and by the role of investment bankers Lazard, which is advising Greece on the debt issue, the source said.

The escalating standoff has alarmed the euro zone's international partners.

U.S. Treasury Secretary Jack Lew told U.S. broadcaster CNBC: "I think that the heat has to come down a little bit in the conversation.

"Everybody's got to tamp down the rhetoric a little bit," Lew said in an interview taped Sunday night and aired on Monday. "There needs to be a conversation where Greece and all of the parties that it's engaged with, look for a practical, pragmatic path forward."

Washington has raised public pressure on the euro zone to compromise with Greece, irritating Germany, which has pressed for Athens to stick to commitments to austerity and achieving a large budget surplus to pay down its debt.

Canadian Finance Minister Joe Oliver also called for a deal over Greece's debt, telling Reuters that while Athens must not default, its creditors also needed to work with it "to arrive at a compromise solution".

In London, a British Treasury official said Cameron had discussed contingency plans for a possible Greek exit from the euro zone with senior finance officials.

"It is not saying that anyone thinks it is going to happen, but it is right that they have a look at the risk of Greece leaving the euro zone. That would create real instability," he said. (Additional reporting by David Milliken in London, Randall Palmer in Istanbul, Michael Nienaber and Stephen Brown in Berlin; Writing by Paul Taylor; editing by Anna Willard)

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