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

Meetings brokered by Greek President Karolos Papoulias were set to 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 five European central bankers broaching the once-taboo topic of its exit from the euro.

“We're really getting to a denouement,” Michael O'Sullivan, head of portfolio strategy at Credit Suisse Private Banking, said today in a Bloomberg Television interview. “We're getting to the part where a decision has to be made” on whether Greece leaves the 17-nation currency union, he said.

Euro finance ministers meeting today in Brussels may discuss the bailout for Greece, as well as the situation in Spain, where the government last week made a fourth attempt to clean up banks. Getting German Chancellor Angela Merkel to weaken her demand that debt cutting be the core of the crisis response will be a key objective of new French President Francois Hollande when the two meet 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 in Italy and Spain tumbled, with Spanish 10-year yields climbing to more than 6.2 percent today for the first time since Dec. 1. Each country's spread against German 10-year notes jumped by more than 30 basis points.

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

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

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

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

The European Commission isn't considering easing the terms of the joint bailout for Greece from the EU and the International Monetary Fund, EU spokesman Amadeu Altafaj said, denying a report by Athens-based Real News.

No Movement

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

A Greek departure from the euro area could trigger a default-inducing surge in bond yields, capital flight that might spread to other indebted states and a resultant series of bank runs. Although Greece accounts for 2 percent of the euro-area's economic output, its exit would fragment a system of monetary union designed to be irreversible and might cause investors to raise the threat of withdrawal by other states.

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

European Union Economic and Monetary Commissioner Olli Rehn said in Tallinn that the region is “certainly more resilient” to a possible Greek exit than it was two years ago, when the bloc would have been “massively underprepared.”

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

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

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

“Syriza won't betray the Greek people,” party leader Alexis Tsipras said in a statement yesterday as Papoulias began a final bid to coax parties into a coalition. The failure to form a government has prompted concern that Greece may backtrack on pledges to cut spending as part of the bailout requirements negotiated since May 2010, so foreshadowing a euro withdrawal.

Merkel Setback

The latest defeat was suffered by Merkel yesterday in Germany's largest state, North Rhine-Westphalia, where her Christian Democratic Union suffered its worst defeat there since World War II. The German Social Democrats, the main opposition party nationally, tightened their grip among German regional governments.

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

“I expect both of them to give a clear signal of commitment to stability of the euro zone of overcoming the sovereign debt crisis,” 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 will look toward a summit dinner in Brussels on May 23.

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

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

Bloomberg News

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Greek Euro Exit Rattles Markets

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