Greece's possible exit from the euro area moved to the center ofEurope's financial-crisis debate, rattling markets as authoritiesin Athens struggled to form a government.

Meetings brokered by Greek President Karolos Papoulias were setto continue today after Syriza, the leading anti-bailout party,rejected a unity government following inconclusive elections May 6.That moved the country closer to a new vote, with at least fiveEuropean central bankers broaching the once-taboo topic of its exitfrom the euro.

“We're really getting to a denouement,” Michael O'Sullivan, headof portfolio strategy at Credit Suisse Private Banking, said todayin a Bloomberg Television interview. “We're getting to the partwhere a decision has to be made” on whether Greece leaves the17-nation currency union, he said.

Euro finance ministers meeting today in Brussels may discuss thebailout for Greece, as well as the situation in Spain, where thegovernment last week made a fourth attempt to clean up banks.Getting German Chancellor Angela Merkel to weaken her demand thatdebt cutting be the core of the crisis response will be a keyobjective of new French President Francois Hollande when the twomeet tomorrow in Berlin.

The euro fell for the 10th day in 11, weakening 0.4 percent to$1.2872 at noon in Brussels, the lowest in three months. Bonds inItaly and Spain tumbled, with Spanish 10-year yields climbing tomore than 6.2 percent today for the first time since Dec. 1. Eachcountry's spread against German 10-year notes jumped by more than30 basis points.

The Euro Stoxx 50 Index declined as much as 2.4 percent to itslowest in almost five months after European Central Bank policymakers including Christian Noyer today joined Jens Weidmann,Patrick Honohan, Ewald Nowotny and Joerg Asmussen in discussing apotential Greek exit from the euro.

“Whatever happens in Greece won't be a problem for the Frenchfinancial sector,” Noyer told journalists today in Paris. “I don'tknow a single group that will be placed in difficulty by an extremescenario for Greece.”

German Finance Minister Wolfgang Schaeuble reiterated inSueddeutsche Zeitung that member states seeking to hold the line onausterity in Greece could not force the country to stay.

The euro-area finance ministers will convene in Brussels at 5p.m. local time.

The European Commission isn't considering easing the terms ofthe joint bailout for Greece from the EU and the InternationalMonetary Fund, EU spokesman Amadeu Altafaj said, denying a reportby Athens-based Real News.

No Movement

“I'm not aware of any discussions within the commission to grantnew provisions, new concessions in the program” for Greece, Altafajsaid by phone yesterday.

A Greek departure from the euro area could trigger adefault-inducing surge in bond yields, capital flight that mightspread to other indebted states and a resultant series of bankruns. Although Greece accounts for 2 percent of the euro-area'seconomic output, its exit would fragment a system of monetary uniondesigned to be irreversible and might cause investors to raise thethreat of withdrawal by other states.

Europe's central bankers are discussing the possibility of aGreek departure and how to handle the fallout, Swedish RiksbankDeputy Governor Per Jansson said in an interview on May 11.

European Union Economic and Monetary Commissioner Olli Rehn saidin Tallinn that the region is “certainly more resilient” to apossible Greek exit than it was two years ago, when the bloc wouldhave been “massively underprepared.”

“I still believe that Greece can stay in the euro and find theway to make sure that it respects its commitments,” Rehn said. “Itwould be much worse for Greece and Greek citizens, especially forthe less well-off Greek citizens, if Greece did leave the euro thanfor Europe as such. Europe also would suffer, but Greece wouldsuffer more.”

Under a story headlined “Akropolis Adieu, Why Greece Must Leavethe Euro”, Germany's Der Spiegel magazine today reported that theEU may provide funding for Greece even after a euro exit, citingplans formulated by Schaeuble's ministry.

After elections in Greece and France signaled a backlash againstthe German-led agenda of scaling back spending to battle the debtcrisis, officials across the region have re-tuned their rhetoric toemphasize growth and employment.

“Syriza won't betray the Greek people,” party leader AlexisTsipras said in a statement yesterday as Papoulias began a finalbid to coax parties into a coalition. The failure to form agovernment has prompted concern that Greece may backtrack onpledges to cut spending as part of the bailout requirementsnegotiated since May 2010, so foreshadowing a euro withdrawal.

Merkel Setback

The latest defeat was suffered by Merkel yesterday in Germany'slargest state, North Rhine-Westphalia, where her ChristianDemocratic Union suffered its worst defeat there since World WarII. The German Social Democrats, the main opposition partynationally, tightened their grip among German regionalgovernments.

Hollande, who defeated single-term President Nicolas Sarkozy onMay 6 to become the first Socialist president of the Fifth Republicin almost two decades, will take office tomorrow and begin hiscampaign to shift the focus of crisis-fighting away from austerity.Merkel said last week that she'll welcome Hollande for talks “withopen arms.”

“I expect both of them to give a clear signal of commitment tostability of the euro zone of overcoming the sovereign debtcrisis,” Peter Altmaier, the deputy floor leader of Merkel's party,said yesterday on Sky News.

With Hollande among leaders calling for a “growth pact”alongside the German-championed fiscal treaty, euro leaders willlook toward a summit dinner in Brussels on May 23.

Investors will also be watching tomorrow when the Greekgovernment is scheduled to repay 436 million euros ($563 million)on a floating-rate note held by investors who shunned its bond-lossaccord. An EU official said May 10 that the payment decision is upto the government in Athens.

The government in Athens would run out of cash by early July ifcreditors decided to withhold their next aid payment in reaction tostalling progress in Greece, according to a report last week byBank of America Merrill Lynch.

Bloomberg News

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