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09/12/2016

Greek finance minister fans flames by talking up risk of Italy ‘bankruptcy’

Euro & Finance

Greek finance minister fans flames by talking up risk of Italy ‘bankruptcy’

Greek Finance Minister Yanis Varoufakis. Athens, 28 January. [Reuters]

If Greece is forced out of the eurozone, other countries like Portugal and Italy will inevitably follow and the currency bloc will collapse, Greek Finance Minister Yanis Varoufakis said on Sunday (8 February), in comments which drew a rebuke from Rome.

Greece’s new left wing government is trying to renegotiate its debt repayments, and has begun to roll back austerity policies agreed with its international creditors.

In an interview with Italian state television network RAI, Varoufakis said Greece’s debt problems must be solved as part of a rejection of austerity policies for the eurozone as a whole. He called for a massive “new deal” investment programme funded by the European Investment Bank.

“The euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse,” Varoufakis said according to an Italian transcript of the interview released by RAI ahead of broadcast.

The eurozone faces a risk of fragmentation and “de-construction” unless it faces up to the fact that Greece, and not only Greece, is unable to pay back its debt under the current terms, Varoufakis said.

“I would warn anyone who is considering strategically amputating Greece from Europe, because this is very dangerous,” he said. “Who will be next after us? Portugal? What will happen when Italy discovers it is impossible to remain inside the straitjacket of austerity?”

Varoufakis and his Prime Minister Alexis Tsipras received friendly words but no support for debt renegotiation from their Italian counterparts when they visited Rome last week. But Varoufakis said things were different behind the scenes.

“Italian officials, I can’t tell you from which big institution, approached me to tell me they backed us but they can’t tell the truth because Italy also risks bankruptcy and they are afraid of the reaction from Germany,” he said.

“Let’s face it, Italy’s debt situation is unsustainable,” he added, a comment that drew a sharp response from Italian Economy Minister Pier Carlo Padoan, who said in a tweet that Italy’s debt was “solid and sustainable.”

Varoufakis’ remarks were “out of place”, Padoan said, adding that Italy was working for a European solution to Greece’s problems, which requires “mutual trust”.

Italy’s public debt is the largest in the eurozone after Greece’s and Italian bond yields surged in 2011 at the height of the eurozone crisis. They have since fallen steeply and have so far come under little pressure from the renewed tensions in Greece.

Varoufakis said his government would propose a “new deal” for Europe like the one enacted in the United States in the 1930s. This would involve the European Investment Bank investing ten times as much as it has so far, Varoufakis said.

If Europe continues to pursue counterproductive austerity policies the only people who will benefit will be “those who hate European democracy,” he said, citing the Golden Dawn party in Greece, the National Front in France and the United Kingdom Independence Party in Britain.

Background

The anti-austerity Syriza party marked a stunning victory in a Greek snap election held on 25 January, but did not ensure an absolute majority.

Its leader, Alexis Tsipras, said the “vicious cycle of austerity” was over, triggering mixed reactions in the EU.

Tsipras stated that the Greek public debt is not viable, and asked for its restructuring, which amounts to 177% of GDP.

The new Greek leadership got off on a tour of European capitals last week (2-6 February) to seek more favourable terms to the country's EU/IMF bailout.

>> Read: Greece drops hopes of debt write-off, outlines ‘menu’ of options

Timeline

  • 12-13 Feb.: EU leaders meet for summit in Brussels