EU presses Greece to reach debt deal as deadline looms

European Union finance ministers are putting pressure on Greece today to agree to extend its bailout plan, as the euro fell in response to news of a breakdown in talks Monday over the countrys massive debt.

Dutch Finance Minister Jeroen Dijsselbloem suggested a deal on an extension must be reached by the end of the week to give national governments time to pass it by the time Greeces debt deal expires on Feb. 28.

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German Finance Minister Wolfgang Schauble said it is up to Greece to move talks forward, after Finance Minister Yanis Varoufakis dismissed an offer of a six-month extension of the bailout package.

Schauble said the finance ministers who took part in talks were confused over the new Greek government's plans.

"None of my counterparts has understood so far what Greece actually wants," Schuble said. "Its not even clear if Greece knows itself."

Greece rejects further bailout terms

On Tuesday, Varoufakis rejected the finance ministers argument that the only option was to agree to an extension of the bailout for four or six months. Instead, Greece wants a bridge loan from the EU, while it drafts a plan to kickstart its moribund economy.

Varoufakis said Tuesday that there was still lots of time to reach a "very good outcome."

"We know in Europe how to deliberate in such a way as to create a very good solution, an honourable solution out of initial disagreements,"Varoufakis said.

Greeces economy has shrunk by 25 per cent in the past five years amid austerity measures that include lower wages for civil servants and fewer public services.

Meanwhile, it has made little progress in paying back the 240 billion ($340 billion Cdn) euro credit package it took three years ago to avoid bankruptcy.

If it does not get some cash in hand, the danger is that it will default on $1.5 billion in bond payments it owes to the International Monetary Fund in March.

And the long-term danger, which hangs over the talks, is that it will default on its loans to the EU and opt out of the euro, throwing all of Europes economy into turmoil.

Euro, markets fall

Markets were lower across Europe in response to that prospect, with Germany's DAX edging down 0.4 percent and Britain's FTSE 100 down 0.2 per cent, while Greek stocks fell 2.5 per cent. The euro dipped 0.15 percent to $1.1339 US on Tuesday.

There also have been deposit outflows from Greek banks, which are already dependent on their central bank for liquidity.

The European Central Bank will decide on Wednesday whether to maintain emergency lending to Greeces central banks so it can prop up lenders.

Greek media reported that Dijsselbloem and Schauble had blocked a moderate proposal by European Commission economic chief Pierre Moscovici to give Greece an extension with lighter terms.

The Netherlands and Germany instead were insisting the new Syriza government agree to a further six months of austerity with an extended bailout.Varoufakis stated that he was prepared to agree to the terms set by Moscovici.

But optimism remained that there would be a deal, in part because Europe has reached this kind of impasse before and ended up with a compromise.

Optimism over a deal

Both sides have agreed to further talks.

TD Bank economist Andrew Labelle pointed to the brinksmanship at play in Europe, but expressed optimism that a deal would be reached.

"The lack of a new deal is a disappointment. However, there certainly appears to be room for an agreement, particularly in light of the comments by Varoufakis after the meeting,"he wrote in a note to investors.

Labelle said the Feb. 28 deadline should not be seen as a hard deadline, but predicted further volatility in markets as it drew closer.

"If Greece were to leave the euro, the financial chaos that would follow could also spell the end of the Syriza-led government," said Jane Foley, analyst at Rabobank International.

"For this reason it remains our central view that an 11th-hour compromise between Greece and its creditors is still likely."

'Crunch time' for Greece

British Finance Minister George Osborne added to the pressure on Greece at a news conference in Brussels today, saying an agreement was critical to the euro's financial stability.

"Well we are reaching crunch time for Greece and the euro zone and I am here to urge all sides to reach an agreement, because the consequence of not having an agreement would be very severe for economic and financial stability,"he said.

"Now, we have a long-term economic plan in Britain and we can better protect ourselves against those consequences, but what Britain really needs to see is competence, not chaos."