Greece delayed repayment of an IMF loan on Friday and a deputy minister said Athens might call snap elections to break an impasse with lenders that threatens to push the country into bankruptcy and out of the euro.
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European stocks fell and Greek bond yields shot higher as investors worried that months of bitter negotiations between Greece and its international creditors might yet end in failure.
Raising the stakes in the talks, Greece decided to postpone payment of the 300 million euro ($338 million) loan - a highly unusual step, but one that does not yet signal a formal default.
The surprise decision was taken on Thursday, just hours after Prime Minister Alexis Tsipras was presented with a tough compromise deal from lenders that crossed many of his "red lines", including tax hikes, privatisations and pension reform.
The offer is aimed at shoring up Greek state coffers, but it has triggered fury in Greece's ruling Syriza party. Early elections would be a way to seek public legitimacy for the difficult decisions needed to secure more cash.
Greece's bailout expires at the end of June and if no cash-for-reforms deal is done by then, default would seem certain, shunting the euro zone into uncharted waters and opening the way for Greece to exit the single currency.
Tsipras, elected in January on a promise to end years of grinding austerity, is due to brief parliament at 1500 GMT, with his party showing little willingness to back down.
"The lenders want to impose hard measures. If they do not back down from this package of blackmail, the government ... will have to seek alternative solutions, elections," Deputy Social Security Minister Dimitris Stratoulis, a hardliner in the government, told Antenna TV.
Greek Economy Minister George Stathakis said the latest deal, drawn up earlier this week by top level officials, including German Chancellor Angela Merkel, was unacceptable, but stressed that his country did not want to leave the euro zone.
"Our government has a mandate to remain in the euro and get a better deal to ... try to change the terms of the agreement that we have with European partners," he told BBC radio. "Greece has to remain within the euro."
An opinion poll published on Friday on the website Newsit showed that three out of four Greeks wanted to stay in the 19-nation euro zone, while almost one in two was in favour of the government reaching a compromise deal.
Some 37 percent of people questioned in the Alco survey supported early elections to resolve the standoff.
"It is more likely that there will be elections than not," Costas Panagopoulos, head of ALCO pollster, told Greek radio.
Tsipras had indicated late on Wednesday that Athens would hand back the IMF loan on Friday. But less than 24 hours later, his government changed direction, deciding instead to bundle together some 1.6 billion euros it owes the Washington-based lender in June into a single payment at the end of the month.
It was the first time in five years of crisis that Greece has postponed a repayment on its 240 billion euro bailouts from euro zone governments, the European Central Bank and the International Monetary Fund.
The IMF said the manoeuvre was unorthodox, but permissible.
Stratoulis, close to the far-left of the Syriza party, made clear the decision was a negotiating tactic.
"The government's move is a message that it wants to wait and see how far they (lenders) will take it, if they will back off from this unreasonable, inhumane, colonialist package they are proposing," he said.
Greece's bluechip stock index tumbled 4.7 percent, underperforming a 1 percent decline on the pan-European FTSEurofirst 300 index <.FTEU3>, which was on track for its biggest weekly decline since December.
Yields on Greek two-year yields soared nearly three percentage points to over 25 percent, and lower-rated euro zone bonds also headed higher in a sign of growing market unease.
Many analysts expect a last minute aid deal that would avert a Greek exit from the euro but say the coming weeks could see further ructions in Greek politics, keeping markets on edge.
"Fasten your seat belts for what could be a rough ride in Greece," said Berenberg Bank chief economist Holger Schmieding.
An EU source said Tsipras could return to Brussels for further talks late on Friday night or Saturday, possibly along with top IMF and ECB officials.
Time is running out to clinch a deal and get desperately needed further disbursements approved by national parliaments, some of which have appeared highly reluctant to offer Greece much budget slack, before the bailout programme expires.
With Europe's big powers, and the United States, concerned about the unpredictable outcome as Greek reserves shrink toward zero, sources said the creditors had showed some flexibility this week by lowering the budget surplus that Athens will be required to run before debt service payments.
Greece sent its own 47-page compromise proposal to lenders this week, saying it wanted the European bailout fund to pay off Greek bonds held by the ECB, while Greek debt owed to the IMF would be restructured so that it is paid off in two phases.
Tsipras has consistently demanded debt relief from lenders as a key component of any agreement with them, though the creditors have said it is too early to discuss any restructuring of Greek debt as a concession.
(Reporting by George Georgiopoulos, Lefteris Papadimas and Deepa Babington in Athens, Kylie MacLellan in London and Leigh Thomas in Paris; Writing by Crispian Balmer; Editing by Giles Elgood)