Greek Finance Minister Yanis Varoufakis began tense talks with euro zone finance ministers on Wednesday after his new leftist-led government won a parliamentary confidence vote for its refusal to extend an international bailout.
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The former academic said before leaving Athens he was ready for a clash with euro zone paymaster Germany and its allies over Greece's decision to scrap austerity measures, end cooperation with the "troika" of EU/ECB/IMF officials overseeing its bailout program and demand a "haircut" reducing its debt burden.
"If a debt can no longer be paid off then that leads to a haircut," Varoufakis told German magazine Stern in an interview released on Wednesday. "What is critical is that Greece's debt cannot be paid off in the near future."
German Finance Minister Wolfgang Schaeuble has said that if Greece is not willing to request an extension of its 240 billion euro bailout -- the biggest in financial history -- "then that's it," ruling out further assistance or debt forgiveness.
Euro zone ministers said they wanted to hear Greece's ideas at a meeting in Brussels, at which Varoufakis was accompanied by Deputy Prime Minister Yanis Dragasakis. Athens's partners warned that time was short since the bailout program expires at the end of this month with no solution in sight so far.
Spanish Finance Minister Luis de Guindos, whose country avoided a sovereign bailout but had to take EU aid to rescue its banks, spelt out the hard line. "Rules must be respected by all. They apply to all," he told reporters on arrival.
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Varoufakis had a prior meeting with International Monetary Fund chief Christine Lagarde, which both said was constructive. Lagarde flew to Brussels to join the Euro Group meeting in a sign of the importance the IMF attaches to the Greek crisis.
"They are competent, intelligent, they've thought about their issues. We have to listen to them, we are starting to work together and it is a process that is starting and is going to last a certain time," she told reporters.
In Athens, a Greek official said Varoufakis had discussed with Lagarde and the Euro Group's Dutch head Jeroen Dijsselbloem some form of "bridge agreement" for funding the state once the current bailout deal expires at the end of the month.
Greek bond yields rose and shares fell before the meeting, with investors concerned that failure to reach a deal in the next couple of weeks could lead to a possible Greek default and exit from the euro currency.
Asked whether a so-called "Grexit" was on the cards, Varoufakis told reporters on arrival: "Absolutely not."
Meeting his counterparts collectively for the first time, he worked the room before talks started, shaking hands first with Schaeuble, then others. Varoufakis looking relaxed in a designer-label checked scarf and his trademark open-neck shirt.
EU sources said some ministers were surprised that the informal tone extended to him not offering a written document outlining proposals. Varoufakis simply made oral statements.
Economists polled by Reuters this week estimated a one in four chance of Greece leaving the 19-nation single currency area this year -- the highest reading since the start of the Greek debt crisis in late 2009.
Most analysts said the odds were on an agreement between Greece and the euro zone emerging later this month after lots of sound and fury.
"We think that the European community and Greek authorities will reach a compromise such that there will not be an exit of Greece from the euro zone," James McCormack, Global Head of Sovereign and Supranational Group at credit ratings agency Fitch Ratings, told Reuters.
European Union leaders will take up the issue at their first summit with Greek Prime Minister Alexis Tsipras on Thursday. EU officials said they would be briefed on the talks but there would be no room for debt negotiation at a summit mostly devoted to the Ukraine-Russia conflict, fighting terrorism and longer-term reform of the euro zone's governance.
EU officials said a second Eurogroup meeting next Monday was likely to be the venue for the real negotiation.
Tsipras, 40, struck a defiant tone in parliament late on Tuesday, saying that "little Greece" was changing Europe by casting off austerity.
"We are not negotiating the bailout; it was canceled by its own failure," the leader of the hard left Syriza party declared before winning the confidence vote with the backing of 162 lawmakers in the 300-seat chamber.
At least 10,000 Greeks took to the streets of Athens and other cities on Wednesday to demonstrate support for his government in the Brussels negotiations. Smaller leftist satellite rallies were planned in Brussels, outside the European Central Bank in Frankfurt and in London.
Protesters outside parliament in central Athens unfurled banners proclaiming "Bankrupt but Free" and "Stop Austerity."
Tsipras tweeted a picture of the rally, with the message: "In the cities of Greece and Europe the people are fighting the negotiation battle. They are our strength."
Earlier, he agreed to work on reforms with the Organization for Economic Cooperation and Development, a Paris-based inter-governmental think-tank, but said they would not be imposed from outside.
OECD chief Angel Gurria appeared to endorse Tsipras's criticisms of the current bailout program after they met in Athens, saying it had produced low growth, high unemployment, rising inequality and a loss of trust.
Varoufakis has proposed a six-month transition in which Greece would be allowed to issue more short-term debt, receive the proceeds of ECB holdings of Greek bonds and tap unused bank rescue funds while renegotiating its debt. Athens would swap its euro zone loans for GDP-linked bonds and its ECB-held debt for interest-bearing perpetual bonds with no reimbursement date.
EU officials have said the most Greece can expect is a further extension of the repayment deadline for its euro zone loans, a lower interest rate and perhaps a prolonged moratorium on debt service payments, in return for continued reforms under some form of external supervision.
Austria's finance minister, Hans Joerg Schelling, said he thought a solution could be reached by the end of February if Greece wanted, otherwise things would enter a "critical phase" that could cause turmoil on financial markets.
(By Costas Pitas and Ingrid Melander; Additional reporting by Lefteris Papadimas, Angeliki Koutantou, Jeremy Gaunt and Deepa Babington in Athens, Caroline Copley in Berlin and Foo Yun Chee, Robin Emmott, Renee Maltezou, Tom Koerkemeier, Jan Strupczewski, Barbara Lewis, Adrian Croft, Philip Blenkinsop and Alastair Macdonald in Brussels; Writing by Paul Taylor; editing by David Stamp)