Greek debt talks with euro zone break down, way forward uncertain

By Renee Maltezou and Jan Strupczewski

BRUSSELS (Reuters) - Talks between Greece and euro zone finance ministers over the country's debt broke down on Monday when Athens rejected a proposal to request a six-month extension of its international bailout as "unacceptable".

The unexpectedly rapid collapse raised doubts about Greece's future in the single currency area after a new leftist-led government vowed to scrap the 240 billion euro bailout, reverse austerity policies and end cooperation with EU/IMF inspectors.

Dutch Finance Minister Jeroen Dijsselbloem, who chaired the meeting, said Athens had until Friday to request an extension, otherwise the bailout would expire at the end of the month.

How long Greece can keep itself afloat without international support is uncertain. The European Central Bank will decide on Wednesday whether to maintain emergency lending to Greek banks that are bleeding deposits at an estimated rate of 2 billion euros a week.

"The general feeling in the Eurogroup is still that the best way forward would be for the Greek authorities to seek an extension of the programme," Dijsselbloem told a news conference.

Greek Finance Minister Yanis Varoufakis hit back, complaining that Dijsselbloem had refused to discuss a proposal from the executive European Commission that would have given Athens a four-month breathing space in return for the new government holding off on major policy changes.

He sought to play down the setback as a temporary hitch rather than an impasse.

"I have no doubt that within the next 48 hours Europe is going to come together and we shall find the phrasing that is necessary so that we can submit it and move on to do the real work that is necessary," Varoufakis told a news conference.

Varoufakis said he rebuffed a draft statement put to him by Dijsselbloem as the meeting got under way. In comments that appeared aimed at playing on divisions among European officials, he said he would have signed a text put to him before the meeting by Pierre Moscovici, the EU's economics commissioner.

The talks, which had been expected to last late into the night, collapsed in less than four hours.

Both sides showed signs of fraying patience, with several ministers complaining of disappointment and fearing disaster. Dijsselbloem spoke of a need to rebuild trust and Greek officials grumbled that Varoufakis was presented with an unacceptable text as soon as he walked into the room.

Dijsselbloem pleaded with the Greeks to buy themselves time to discuss the way forward calmly by requesting an extension.

But he also said: "Would a new programme look very different? I don't think so. The rules and regulations talk about strict conditionalities. It would still be about fiscal sustainability."

Germany, the euro zone's main paymaster and Greece's biggest creditor, stuck to its hard line.

German Finance Minister Wolfgang Schaeuble said before the talks that Greece had lived beyond its means for a long time and there was no appetite in Europe for giving it any more money without guarantees it was getting its finances in order.

As the meeting in Brussels broke up, a senior Greek banker said Greece's stance boded ill for the markets and the banks.

"It is a very negative development for the economy and the banks. The outflows will continue. We are losing 400-500 million every day and that means about 2 billion every week. We will have pressure on stocks and bond yields tomorrow," he said.

Varoufakis earlier spelled out in a combative New York Times article Greece's refusal to be treated as a "debt colony" subjected to "the greatest austerity for the most depressed economy".

"The lines that we have presented as red will not be crossed," he said.

MONEY FLEEING

An opinion poll showed 68 percent of Greeks want a "fair" compromise with euro zone partners while 30 percent said the government should stand tough even if it means reverting to the drachma currency. The poll found 81 percent want to stay in the euro.

Deposit outflows in Greece have picked up. JP Morgan bank said that at the current pace Greek banks had only 14 weeks before they run out of collateral to obtain funds from the central bank.

The ECB has allowed the Greek central bank to provide emergency lending to the banks, but a failure of the debt talks could mean the imposition of capital controls.

Euro zone member Cyprus was forced to close its banks for two weeks and introduce capital controls during a 2013 crisis. Such controls would need to be imposed when banks are closed. Greek banks are closed next Monday for a holiday.

Leftist Prime Minister Alexis Tsipras had requested a bridge programme for a few months while a new debt relief deal is agreed to replace the existing bailout, which has already forced drastic cutbacks onto ordinary Greeks.

The current programme expires at the end of the month. Some of the problem is semantic. The Greeks will not countenance anything that smacks of an "extension" to the old bailout or a continued role for the supervisory "troika" of international lenders.

($1 = 0.8785 euros)

(Additional reporting by Yann Le Guernigou, Michael Nienaber, Andrew Callus, Ingrid Melander, Alastair Macdonald, Adrian Croft, Foo Yun Chee, Robin Emmott, Tom Koerkemeier and Francesca Landini; Writing by Jeremy Gaunt, Paul Taylor and Alastair Macdonald; Editing by Paul Taylor and Giles Elgood)