Greeks seek debt relief as Europe turns towards confrontation

By Jan Strupczewski and Renee Maltezou

BRUSSELS/ATHENS (Reuters) - Greek negotiators were expected to press international creditors for debt relief on Sunday as European leaders turned increasingly confrontational, trying to force Athens into accepting more austerity and reform in return for cash.

Even Germany's Social Democrat leader, hitherto willing to give leftist Prime Minister Alexis Tsipras the benefit of the doubt, warned Athens it risked falling out of the euro unless it stopped giving Europe "the run-around".

European leaders piled pressure on Tsipras to offer major concessions in the search for a deal with the European Union and IMF as the country faces a debt default within little more than a fortnight.

The toughest language came not from Greece's long-standing conservative critics but from German Social Democrat chief Sigmar Gabriel, who until recently had been regarded as sympathetic, at least by Berlin standards.

He wrote in Bild newspaper that he wanted to keep Greece in the euro. "But not only is time running out but so too is patience across Europe. Everywhere in Europe, the sentiment is growing that enough is enough," said Gabriel, who is vice-chancellor in Angela Merkel's grand coalition government.

"The shadow of an exit of Greece from the euro zone takes on ever clearer shape," he said. "Repeated apparently final attempts to reach a deal are starting to make the whole process look ridiculous. There is an ever greater number of people who feel as if the Greek government is giving them the run-around."

Merkel's Social Democrat coalition partners have felt some solidarity with Tsipras, even though his Syriza party lies much further to the left.

But Gabriel's comments suggest he is fast losing his remaining friends in Europe. Germany's Frankfurt Allgemeine Sonntagszeitung reported European Commission President Jean-Claude Juncker, also reputed to have been more sympathetic to Greek views, warned Tsipras about the risk of "Grexit" - a Greek exit from the euro - when they met last week.

Tsipras says imposing yet more austerity on a country whose economy has shrunk by a quarter in recent years is futile, and will only deepen the suffering of Greeks whose living standards have already dived while unemployment soared.

Giving instructions to his negotiating team before it headed to Brussels for weekend talks, Tsipras said on Friday he may accept bitter compromises, but signalled he wants a significant easing of Greece's huge debt burden in return.

GOOD INTENTIONS

Finance Minister Yanis Varoufakis has questioned the creditors' good intentions. "If you look at the latest proposal from the IMF and from the Commission, it is just the kind of proposal that one puts forward if one does not want an agreement," he told the BBC on Saturday.

Analyst Jacob Funk Kirkegaard cast doubt on the government's longevity. Europe seemed to be giving up on trying to coax Tsipras towards the political centre, opting for confrontation that might lead to "a new more realistic government".

"It is increasingly obvious he is not even a closet centrist but largely seems to agree with the left wing of his party. The euro area thus has no real choice but to seek regime change in Athens," he said on the website of the Peterson Institute for International Economics.

Neither side doubts the urgency of reaching a deal as Greece must repay 1.6 billion euros ($1.8 billion) to the International Monetary Fund by the end of this month or default, putting its future in the euro in grave danger.

But an EU official described this weekend's Brussels talks as difficult, adding: "Positions are still far apart. It is not certain whether there will be an outcome."

Tsipras still seems to have some support in his quest for debt relief. A person familiar with the negotiations told Reuters that discussions were under way on the issue.

Athens faces immediate problems in repaying debts as the EU and IMF have not paid any money from Greece's 240 billion euro bailout programmes since the middle of last year. On top of the IMF loan, it must also repay 6.7 billion euros when Greek bonds held by the European Central Bank fall due in July and August.

Even if this short-term hump can be overcome, Greece still faces the daunting prospect of eventually repaying the bailout loans, something that will hang over its enfeebled economy for decades unless a relief deal is achieved.

A large part of its debt held by private investors was written off in 2012. But any deal that involves writing off public debt is likely to provoke outrage among European taxpayers, who funded the bulk of the bailout loans.

That resistance is strongest in Germany, the biggest contributor to the two bailout programmes since 2010.

DEBT RELIEF NOT TABOO

Nevertheless, the debt relief topic is not taboo. "There is a conversation going on," the source familiar with the negotiations said.

Creditors are pressing Greece to achieve a sizeable primary surplus on the state budget that excludes debt repayments. This would allow Athens to set aside funds to pay off loans in the future without having to borrow yet more from international lenders. However, the government wants lower surpluses to free up funds for helping Greeks who have suffered most.

"There is a much larger financing need for the next several years than expected. So Greece will have to take on lots more debt," the source said, but added: "Greece does not have the capacity to take on more debt without some form of relief."

EU officials question Greek assertions that the debt is asphyxiating the economy as Athens does not have to start repaying the bailout loans until 2023.

The source said a solution need not involve writing down the value of the debt, something that Merkel would probably reject. Merely pushing repayments into the future might do the trick. "Extending maturities would do for many years. It's a perfectly economically reasonable way of making this manageable," the source said.

($1 = 0.8875 euros)

(Additional reporting by Paul Taylor and John O'Donnell; Writing by David Stamp; Editing by Alison Williams and Susan Thomas)