Greece vows not to co-operate with eurozone creditors and IMF as deflation worsens

Fresh eurozone turmoil as Athens sticks to hard line and prices fall at joint-record rate

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Greece's new government insisted yesterday that it would honour its election pledge not to co-operate with its eurozone and International Monetary Fund creditors.

The defiant message from Athens came as the eurozone sank deeper into deflation, with prices falling at their joint-fastest pace on record last month.

“We don’t plan to cooperate with that committee,” said the Finance Minister, Yanis Varoufakis, after a meeting in the Greek capital with Jeroen Dijsselbloem, the head of the Eurogroup. “The Greek state has a future, but what we won’t accept has a future is the self-perpetuating crisis, of deflation and unsustainable debt.”

Yesterday’s meeting was the first substantive contact between Greece and eurozone officials since the Syriza party’s sweeping victory in last Sunday’s election. Mr Varoufakis said he told Mr Dijsselbloem that the new government would deliver a balanced budget and enact reforms to make the domestic economy more competitive but that it would not accept further austerity measures.

Negotiations in the coming weeks are expected to focus on the government’s demands for a significant reduction in the roughly €200bn debt that Athens owes to other eurozone states, stemming from its two bailouts since 2010.

Mr Dijsselbloem, however, said that Greece must respect the terms of its existing bailout and warned against any unilateral action.

Greece’s Troika bailout is due to expire on 28 February when a final payment of €7bn is due. Without an agreement by that date, Greece’s banks could be shut off from emergency funding from the European Central Bank and the government, cut off from financial support, could be forced to default.

The share price of Greek banks collapsed by 40 per cent this week as investors reacted to Syriza’s election win. The yield on Greek three-year debt shot up from 17.7 per cent to 19.4 per cent yesterday, signalling rising default fears. Ten-year yields rose from 10.5 per cent to 11.3 per cent. The Athens stock market lost another 1.6 per cent, ending the week down 13.7 per cent.

Mr Varoufakis plans to visit London, Paris and Rome next week for talks, according to a statement from the Athens finance ministry. A trip to Germany, Greece’s largest creditor, was conspicuous by its absence from the itinerary. European finance ministers have signalled that the February deadline could be extended.

Greece’s negotiations will take place against a backdrop of falling prices. Consumer prices fell by 0.6 per cent this month according to the Eurostat statistical office, equalling the record drop recorded in July 2009 during the Great Recession. The figure, a deterioration on the 0.2 per cent price decline in December, was accounted for by tumbling fuel costs; energy prices were 8.9 per cent lower than a year earlier. Core inflation, which excludes energy and food, also weakened to 0.5 per cent, from 0.7 per cent previously.

Earlier this month, the ECB announced a €1.1trn programme of bond purchases in order to return the single currency inflation rate to the official target of just below 2 per cent.

Greece is already experiencing deeper deflation, with prices falling by 2.5 per cent in December. There was mixed economic news from elsewhere in the eurozone yesterday. Spain grew at its fastest rate in seven years – 0.7 per cent – in the final quarter of the year, but Belgian GDP rose by only 0.1 per cent.