Varoufakis counting on ECB as Sapin says Greece needs new contract with eurozone

Greece is counting on the European Central Bank to maintain a financial lifeline while the week-old government in Athens negotiates new terms on its international bailout package, Finance Minister Yanis Varoufakis said.

While the country is “desperate” for funds, it will forgo further disbursements of emergency aid until negotiating a “new social contract” with its creditors, he said. He set an end-May deadline for reaching a deal on a revamped rescue with the euro area and the International Monetary Fund.

“For that period, we’re not going to ask for any more loans,” Varoufakis told reporters today in Paris after meeting French Finance Minister Michel Sapin. “During this period, it is perfectly possible in conjunction with the ECB to establish the liquidity provisions that are necessary.”

The danger for Prime Minister Alexis Tsipras, who won power on Jan. 25 following pledges to undo more than four years of austerity tied to emergency aid, is that both the country’s banks and the government could be left without funding as soon as next month. Greece has until end-February to qualify for an aid payment of as much as 7 billion euros ($7.9 billion) and hasn’t indicated any willingness to seek an extension.

Letting the review lapse under Greece’s 240 billion-euro aid program could result in its banks effectively being excluded from ECB liquidity operations while the government is still shut out of international bond markets.

At the moment, Greece has a special dispensation from the ECB because the country is considered to be complying with the bailout pact. That means its debt can be used in central-bank refinancing operations even though it is rated junk.

Varoufakis, whose Paris visit was the first of a series of trips to European cities to press his case, said he intends travel to Frankfurt to seek support for Greek banks from the ECB while a political accord on an aid overhaul is negotiated with the euro area and the IMF. He’s scheduled to see British Chancellor of the Exchequer George Osborne in London tomorrow.

A revamped rescue for Greece, where unemployment is more than 25 percent, would address a “humanitarian crisis,” the need for investment and the country’s debt mountain of about 180 percent of gross domestic product, he said.

“What this government is all about is ending the addiction” to funds that are tied to demands for austerity, Varoufakis said. The government is willing to “go cold turkey for a while, while we’re deliberating,” he said.

At the same briefing, Sapin said France would be willing to offer Greece debt relief in the form of longer repayment periods and lower interest rates while rejecting a writedown that Tsipras has demanded. That position mirrors the euro area’s stance.

“Anything that can alleviate the Greek debt burden will be welcome … but of course there is no question of cancelling the Greek debt,» Sapin said.

He added that this would simply mean that instead of the Greek taxpayer it would be for the European or French taxpayer to foot the bill.

Sapin said he wants to facilitate a new deal for Greece with its official creditors after hearing the country’s plans for economic revival.

Sapin said that it’s “legitimate” for Greeks to be concerned about their debt burden and the country needs investment to generate economic growth after meeting the Greek finance minister, Yanis Varoufakis, in Paris on Sunday.

Greece’s creditors should offer the country a “new contract,” Sapin said.

Varoufakis said that Greece wants its debt repayments to be tied to economic growth and appealed to the European Central Bank to keep funding the country’s lenders until an agreement is reached. Varoufakis said he’ll arrange a meeting with German Finance Minister Wolfgang Schaeuble within the next 24 hours and also plans to visit Frankfurt.

Varoufakis appointed Lazard Ltd. as adviser on issues related to public debt and fiscal management on Saturday.

“There is a range of possible solutions: extending the maturities, lowering interests rates, and the much more radical solution, the haircut,” Matthieu Pigasse, the head of Lazard’s Paris office who has advisedGreece in the past, said in a Jan. 30 interview on BFM Business television. “If we could cut the debt by 50 percent” he said, “it would allow Greece to return to a reasonable debt to GDP ratio.”

He said Greece’s debt to public creditors was about 200 billion euros.

[Reuters & Bloomberg]