Greece hits political stalemate, euro exit fears grow

(Reuters) – Greek political leaders stuck to entrenched

positions before another round of coalition talks on Monday, dashing hopes of a last-minute compromise

to avoid a new election that risks pushing the country closer to financial default.

European shares slid and Spanish and Italian bond yields rose as investors

fretted the political deadlock meant Greece was on track to become the first country to

abandon the euro.

Greece’s political landscape has been in disarray since an inconclusive

election on May 6 left parliament divided between supporters and opponents of a 130 billion-euro

($168-billion) EU/IMF bailout, with neither side able to form a government.

With the country set

to run out of money as early as next month and no government in place to negotiate the next aid

tranche, investors are betting that a long-speculated Greek default and euro exit will happen sooner

rather than later.

“There’s a real risk for the market that at some point Greece will have to

leave the euro if they don’t find political cohesion,” said ING strategist Alessandro

Giansanti.

After an initial effort at cajoling party leaders into a coalition proved fruitless,

President Karolos Papoulias summoned four party leaders for a fresh round of talks at 7:30 p.m. (1630

GMT).

But the talks appeared doomed long before they began, as the young leader of the radical

leftist, anti-bailout SYRIZA party said he would not attend and another leftist leader refused to take

part in any coalition unless SYRIZA was on board.

The support of at least one of those two

leftist parties is crucial for conservative and Socialist parties to renew a pro-bailout coalition to

steer Greece out of trouble.

The 82-year-old Papoulias was in a similar position just six months

ago when he brokered an emergency coalition under strong pressure from European leaders determined to

prevent a Greek collapse from sparking a market run on Spain and Italy.

This time, however, EU leaders – who have

bailed out debt-stricken Greece twice only to see it fail to pass reforms – have responded more coolly

to the idea of a Greek default.

Emboldened by a reinforced financial firewall to protect weak euro zone

states, and by an injection of cheap money to banks from the European Central Bank, EU leaders have

broken a taboo by openly discussing the possibility of Greece leaving the euro zone, stressing it is a

choice for Greeks to make.

“We wish Greece will remain in the euro and we hope Greece will

remain in the euro … but it must respect its commitments,” European Commission spokeswoman Pia

Ahrenkilde Hansen told a regular news briefing.

“Greece has its future in its own hands and it

is really up to Greece to see what the response should be.”

German Chancellor Angela Merkel,

leader of the continent’s biggest and strongest economy, said it would be better for Greece to keep

the euro. She also said EU leaders should help it recover – but added that such solidarity would cease

in what she called the unlikely event of Athens reneging on agreements.

“GOD HELP US”

The

prospect of national bankruptcy and a return to the drachma appeared to be slowly sinking in among

Greeks, who must now choose between the pain of spending cuts demanded in return for aid and the

prospect of even more hardship without the euro.

“We have to stay in the euro. I’ve lived the

poverty of the drachma and don’t want to go back. Never! God help us,” said Maria Kampitsi, 70-year

old pensioner, who was forced to shut her pharmacy two years ago due to the economic

crisis.

“They must cooperate or we’ll be destroyed. It will be chaos. For once, they must care

about us and not their own position.”

Capturing the self-defeating nature of an election that

has drawn the country towards bankruptcy, the Ta Nea daily ran a front-page image of a man in

silhouette shooting himself in the head and red blood spattering behind to form a map of

Greece.

“SYRIZA has paved the way for new elections. And this time, whether we like or not, they

will be more like a referendum. We will have set ourselves the question whether we prefer the euro or

the drachma,” centre-left daily Ethnos wrote in an editorial.

Polls suggest SYRIZA would come

first if elections were held again, netting it a bonus of 50 extra seats in the 300-seat parliament and

raising the odds for an anti-bailout coalition taking control of government.

European leaders in

recent days have reacted with growing disbelief to the rhetoric from the party’s 37-year-old leader

Alexis Tsipras, who has promised Greece can simultaneously renege on the terms of its bailout and stay

in the euro zone.

“I think that is an impossible equation and I think in that sense it is an

irresponsible statement,” said Finland’s Minister for European Affairs Alexander Stubb.

German

Finance Minister Wolfgang Schaeuble said Greece was in a “dreadfully difficult situation” but would pay

a high price if it left the euro.

Yet none of this has fazed Tsipras, who has gone from strength

to strength on his pro-euro and anti-bailout message to become the unexpected Greek political star of

the moment.

His rise comes against the backdrop of a fifth year of recession in Greece, which

has left one Greek in five jobless and ushered in an increasingly volatile social climate.

Three

gas canisters exploded at tax office in an Athens suburb early on Monday, causing minor damage, police

said.

Greece is also due to decide on Monday whether it pays out or defaults on about 430

million euros of a bond maturing on Tuesday. It was only partially exchanged under a landmark debt

restructuring this year.

($1 = 0.7726 euros)

(Additional reporting by Tatiana Fragou and

Lila Chotzoglou; writing by Deepa

Babington; Editing by Philippa

Fletcher)