European creditors on Wednesday pulled a recently announced debt relief package for Greece in protest against subsequent spending measures announced by Athens.
Greek stocks fell sharply and the government's borrowing rates jumped as investors fretted over a potential flare-up in the country's bailout problems and the possibility of early elections in the country.
The main stock market in Athens closed down 3.2 percent, while the yield on the country's 10-year bond rose 0.28 percentage point to 7.01 percent — above the 7 percent level that is considered to be unaffordable.
The market moves came after Michel Reijns, the spokesman for the eurozone's top official, said in a tweet that recent, unsanctioned actions by the Greek government "appear to not be in line with our agreements." As such, he said, there was "no unanimity" for implementing the short-term debt measures announced December 5.
At a meeting of the eurozone's 19 finance ministers, creditors offered some immediate debt help to Greece. They included smoothing some of Greece's repayments to prevent debt humps and a waiving of an interest rate increase. Officials said the measures could chop 20 percentage points off Greece's debt burden through 2060. Greece's debt is worth around 180 percent of its GDP, a level experts consider unsustainable.
Days after that agreement, however, Greek Prime Minister Alexis Tsipras announced that his government would distribute 617 million euros ($650 million) this Christmas to 1.6 million low-income pensioners, replacing a holiday bonus scrapped by Greece's bailout creditors — and whose reinstatement had been a key electoral pledge by Tsipras' Syriza party.
Tsipras also said his government would restore a lower sales tax rate for Aegean Sea islanders who are struggling to cope with mass arrivals of migrants from Turkey.
Taken by surprise by Greece's new spending measures, the eurozone creditor nations said Wednesday that they wanted more information on whether the costs would affect Greece's ability to meet its financial targets.
The eurozone's strong reaction was given added weight as it came on the eve of a year-end European Union summit where Tsipras is set to discuss the state of his debt-ridden nation with other leaders.
To further complicate matters, Greece is also involved in a public spat with the International Monetary Fund, a key bailout creditor, over the need for future spending cuts.
Pension bonus vote
Greek Finance Minister Euclid Tsakalotos said the Christmas pension bonus would be voted on Thursday in Parliament, and he tried to play down the dispute, saying the issue would be sorted out.
"We believe, and we will explain this to anybody who asks us, that [the payments] are within the bailout framework," he said late Wednesday, after talks with representatives of European creditors and the IMF. "And I think that when the necessary explanations are provided, [the Europeans] will understand that."
Tsipras defended the spending measures earlier, in comments made before the eurozone suspended its debt relief measures, and said he had "no doubt" about their legitimacy.
He noted that Greece has to deal with its economic difficulties at a time when it's also at the front line of the immigration crisis.
"In the name of Europe, the Greek people are making sacrifices, and everyone must show respect for this," Tsipras said.
The president of the Socialist and Democrats group in the European Parliament, Gianni Pittella, backed Tsipras, expressing outrage at the "shameful" suspension of the debt relief measures.
"It is unacceptable to trade fair and necessary social measures, such as support to low-income pensioners, with the debt issue," Pittella said. "Eurozone finance ministers must review this harmful decision for the sake of the Greek people and the European Union."
Analysts said the eurozone's move put Tsipras in a tough situation and could pave the way for early elections.
"If Tsipras goes ahead, this would further antagonize the eurozone creditors, putting at risk the promised short-term debt relief," said Wolfgango Piccoli, co-president of Teneo Intelligence. "On the other side, giving in to the creditors' pressure would make Tsipras look amateurish at best, and at worst further undermine his credibility and standing domestically."
Piccoli said Tsipras, "after overplaying his hand," could be tempted to "cut his losses" by calling early elections before his party loses even more support for adopting more unpopular measures.
Although the government has repeatedly ruled out early elections, a cabinet minister from Tsipras' small right-wing coalition partner said Wednesday that the eurozone's "brutal blackmail" should change that.
"The only civilized solution would be to call elections and say that, 'This is the situation, we are being blackmailed,' " said Kostas Zouraris, a deputy education minister. "For centuries, Greeks have been mercilessly oppressed by the Westerners."
Opinion polls show that the center-right New Democracy party has double-digit leads over Syriza and that it would most likely form the next government.
Anti-austerity protests — which Tsipras' Syriza party spearheaded while in opposition — have continued under the left-led government. On Wednesday, about 80 state hospital workers, who were holding a six-hour work stoppage, protested outside the health ministry against state spending cuts. They symbolically bricked up the building's entrance before marching through the city center.