Tsipras Targets Euro Area Deal Ahead of Diplomatic Push

Prime Minister Alexis Tsipras sought to repair relations with Greece’s creditors ahead of a diplomatic push to win support for his economic program, as euro-area officials said they’re looking for concessions from the new government.

Greece will repay its debts to the European Central Bank and the International Monetary Fund, Tsipras said in a statement e-mailed to Bloomberg News on Saturday. That leaves the euro-area nations that funded most of the country’s financial rescue as the focus for the debt writedown that Tsipras is seeking. The prime minister said he expects to reach a deal with the euro area “soon.”

“The deliberation with our European partners has just begun,” Tsipras said. “Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole.”

Bond yields surged on Friday after Finance Minister Yanis Varoufakis said the new government will turn its back on the rescue program that allowed Greece to pay pensions and public wages for the past five years in exchange for a punishing regime of spending cuts that wiped out 25 percent of its economy.

Tsipras’s Requests

While euro area officials want Greece to stick to the austerity set out in its bailout agreement, Tsipras is looking for a writedown so he can increase public spending to revive the economy. The French government has so far offered the strongest encouragement to Greece.

“It’s legitimate for them to say we want to discuss how we can lower the weight of this debt,” French Finance Minister Michel Sapin, who is due to meet Varoufakis late on Sunday, said in a television interview. “We can discuss, we can postpone, we can alleviate. But we won’t cancel it.”

The French government’s exposure to Greece is about 42 billion euros ($47 billion), Sapin said.

The danger for Tsipras, who won power in a Jan. 25 election, is that unless the euro area backs down, both the country’s banks and the government could be left without funding next month. Ending the bailout program could see Greek banks effectively excluded from ECB liquidity operations while the government is still shut out of international markets.

Euro-Area Resistance

“Europe will continue to show solidarity with Greece, as well as other countries particularly affected by the crisis, if these countries undertake their own reforms and savings efforts,” German Chancellor Angela Merkel said in an interview with Hamburger Abendblatt.

Former Prime Minister Antonis Samaras said last month the government may run short of financing as early as March.

Jeroen Dijsselbloem, chairman of the euro area finance ministers’ group, welcomed Tsipras’s comments on Saturday. His differences with the Greeks had been laid bare during a meeting in Athens the previous day.

“It is now up to the Greek government to determine its position on how to move forward,” Dijsselbloem said in a text message. “Further decisions will be taken jointly in the Eurogroup in the coming weeks.”

Damage Control

At the moment, Greece has a special dispensation from the ECB because it’s considered to be complying with the bailout program. That means its debt can be used in central bank refinancing operations even though it is rated junk.

“There will be no surprises if we find out that a country is below that rating and there’s no longer a program that that waiver disappears,” ECB Vice President Vitor Constancio said at an event in Cambridge, England, on Saturday.

Greek bonds tumbled on Friday, with the yield on three-year government debt rising 187 basis points to 19.15 percent, the highest level since the 2012 debt restructuring. Ten-year yields posted their biggest weekly increase since May that year and bank stocks have dropped 38 percent since the election, their biggest weekly decline in almost two years.

Tsipras has already started to roll back the austerity program. He asked for the resignation of Emmanuel Kondylis, chairman of the fund overseeing the country’s privatization program, and Paschalis Bouhoris, its chief executive officer, a spokeswoman for the fund said late Friday.

The Greek Finance Ministry on Saturday hired Lazard Ltd. to advise on its debt strategy. Prior to the appointment, Matthieu Pigasse, the head of Lazard’s Paris office who has advised Greece in the past, said a 50 percent haircut would give Greece a “reasonable” debt burden.

European Views

Other euro members are divided over Tsipras’s proposals. A press officer for the Spanish government, owed about 26 billion euros by Greece, said Prime Minister Mariano Rajoy’s position that Tsipras must honor his country’s commitments remains unchanged.

Rajoy, who signed Spain up to its own austerity program in 2012, is facing a challenge from the anti-austerity party Podemos. Tsipras’s Spanish ally has eclipsed Rajoy’s party in some recent polls and on Saturday its leader Pablo Iglesias said he would restructure Spain’s 1 trillion euros of public debt if he wins office.

Italian Prime Minister Matteo Renzi, boosted by the election of a new president on Saturday, welcomed Tsipras’s conciliatory tone.

“This statement is not just important per se, but especially because it is complemented by the renewed assurance that a specific effort to address structural problems by the new Greek government is undertaken,” Filippo Taddei, Renzi’s economic adviser, said in an e-mail.

On Tour

Tsipras’s diplomatic effort continues next week when he travels to Cyprus on Monday to meet President Nicos Anastasiades before talks with Renzi and France’s Francois Hollande on the following days. He’ll meet European Commission President Jean-Claude Juncker in Brussels on Wednesday, an EU official said. Tsipras also spoke to Juncker by phone on Saturday, the official said.

The Greek leader is so far not scheduled to meet Merkel, the biggest contributor to Greece’s bailout, until the European Union summit in Brussels on Feb. 12.

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