The euro zone will not tear up the main targets of Greece's bailout no matter who wins Sunday's elections, but it might consider giving a new government in Athens some leeway on how it reaches them, euro zone officials said.
Even that offer would depend on a government being in place that was prepared to stick to the prescribed austerity path and some policymakers are reluctant to go even that far.
If Greece rejects the bailout deal it struck in February, all bets would be off and pressure would grow on it to quit the currency bloc.
“The headline targets cannot be changed,” one senior EU official told Reuters. “There could be some tweaks to the path to get there, but not the goals.”
No Greek party has called for euro exit, but the leftist SYRIZA party, which is running neck-and-neck with conservative New Democracy party, rejects the stringent terms of the bailout, without which Greece will default.
SYRIZA leader Alexis Tsipras believes he can get much more favourable terms for Greece - a view EU leaders roundly reject.
“If the Greeks do not meet the commitments they have made, do not meet their financial commitments, do not repay loans, Slovakia will demand that Greece leaves the euro zone,” Slovak Prime Minister Robert Fico told parliament on Thursday, although he said Europe should strive to keep Greece in.
French President Francois Hollande also warned Athens that if it reneged on the terms of the bailout, it could face a return to its old currency, the drachma.
“I have to warn them, because I am a friend of Greece, that if the impression is given that Greece wants to distance itself from its commitments and abandon all prospect of recovery, there will be countries in the euro zone which will prefer to finish with the presence of Greece in the euro zone,” he said.
If a SYRIZA victory sparked panic about a return of the drachma, the immediate action would come from the country's central bank, backed by the European Central Bank.
The Greek central bank has the ability to directly inject cash into the country's banks, if savers rush for their money, in the form of Emergency Liquidity Assistance, which although provided by the ECB, would be underwritten solely by Greece.
Top ECB officials and staff would also keep a close watch from Frankfurt and keep in touch with other euro zone central banks, in case there were signs that people in other countries such as Spain were starting to pull their cash from banks.
EU officials say euro zone countries are also preparing longer-term contingency plans for a possible Greek exit from the euro, concerned about possible bank runs and public unrest, including the suspension of the Schengen passport-free zone and imposing capital controls and limiting ATM withdrawals.
Under the memorandum of understanding detailing the terms of its 130 billion euros bailout, Greece must cut its debt to 116.5 percent of GDP, from 165 percent in 2011.
This can only be achieved through savage public spending cuts, sweeping structural reforms and privatisation - all of which face substantial opposition in Greece.
Germany insists that Greece stick to the memorandum but it has also indicated that if Athens can come up with specific and meaningful ways of boosting growth there may be ways of incorporating those.
A German EU official said regardless of who wins the Greek vote, a new government would be given a final chance.
“There will be a very clear 100-day plan for a new government. If it's not implemented in full, then the game is over,” the official said. “This is a very bitter election for the Greek people. They are being asked to support the old guard that got them into this mess.”
Under the current rules Greece must cut its budget deficit to below 3 percent of GDP in 2014. Leaders of the pro-bailout Greek parties have already called for a year or two more, a concession already granted to Spain with Germany's blessing.
The chairman of euro zone finance ministers, Jean-Claude Juncker, suggested last month that some leeway might be possible if the next Greek government vowed to implement the bailout terms.
“The Greek government would have to make clear it was fully committed to the programme, and then, if there were exceptional circumstances, we wouldn't exclude the possibility of discussing this issue,” he said, although he ruled out substantial changes.
Such a move, given the depth of Greece's depression, would be compatible with EU budget rules, euro zone officials said, and would provide a new government with a political victory at the start of its term.
That might well work if the pro-bailout New Democracy takes first place and the 50 parliamentary seat bonus that comes with it. But if SYRIZA takes that prize, it would fall well short of the wholesale abandonment of austerity it is demanding.
Euro zone officials said the view expressed by Juncker last month still held broadly true now, although not all backed it.
“Juncker's statement actually captures the prevailing mood pretty well, even though it promises more to the Greeks than what was agreed at the meeting in question,” one euro zone official familiar with the Greek debate said, referring to the meeting of euro zone finance ministers on May 14.
The reluctance to show much leniency to Greece stems from the fact that Athens had used up all the goodwill it had among euro zone finance ministers during two years of missing targets and dragging its feet on reforms.
“Their performance has not been brilliant, to say the least,” the senior EU official said. “There is no positive mood towards Greece.
“The Stability and Growth Pact has some flexibility and a recession is one of the factors that can be taken into consideration, but mainly it is about implementing economic reforms,” the official said.
Because of the uncertainty of the Greek election outcome and its impact on the bloc as a whole, euro zone finance ministers will be on stand-by to hold a teleconference if necessary, one official said. A regular meeting of euro zone finance ministers is scheduled for June 21 in Luxembourg.
In the end, if Greece is to stay the course most economists say a fundamental overhaul of its austerity programme, which it cannot hope to meet without driving itself further into depression, is needed and maybe a third bailout.
EU officials have said Greece is already behind on its obligations under the second bailout, not just on budget cuts but on revenue generating measures such as privatisation.
That has increased expectations that if Greece is going to remain in the euro zone, a third package of support will be necessary, and that may have to include a further restructuring of its debt, which would mean official sector loans being written down in value. - Reuters