(Reuters) - A war of words between Greece and EU paymaster Germany escalated on Tuesday with Athens' new leftist prime minister rejecting what he called "blackmail" to extend an international bailout and vowing to rush through laws to reverse labor reforms.  A source close to the government said Greece intends to ask on Wednesday for an extension for up to six months of a loan agreement with the euro zone, on conditions to be negotiated. The source drew a distinction between a loan agreement and the full bailout program which the government insists is dead.  However hardline German Finance Minister Wolfgang Schaeuble dismissed the Greek gambit, telling broadcaster ZDF: "It's not about extending a credit program but about whether this bailout program will be fulfilled, yes or no."   Financial markets held their nerve after the latest talks among euro zone finance ministers broke down late on Monday and EU partners gave Greece until the end of the week to request an extension or lose financial assistance.   Many investors believe that whatever the rhetoric, both sides will find a face-saving formula before Athens' credit lines expire in 10 days. If they fail, Greece could rapidly run out of cash and need its own currency.  Greek banking sources said outflows of deposits increased on Tuesday after the failure of Monday's talks, but were not as severe as on some days last month around the election of a radical anti-austerity government.  The European Central Bank will review emergency funding for Greek banks on Wednesday but should not cut the lifeline this week, a source familiar with the situation said.   Both sides continue to insist Greece will remain in the euro.  Greek Prime Minister Alexis Tsipras told lawmakers in his Syriza party that the government - elected to scrap the bailout, repeal hated austerity measures and end cooperation with the "troika" of EU, ECB and IMF lenders - would not compromise.

Greece's anti-austerity government is presenting its first concrete proposals for an alternative debt plan at an emergency meeting of eurozone finance ministers in Brussels.  The government wants to overhaul 30% of its bailout obligations, replacing them with a 10-point plan of reforms.  But EU ministers have warned that Greece must abide by existing terms.  The EU-IMF bailout for the debt-laden country expires on 28 February and Greece does not want it extended.  Instead the new Athens government is asking for a "bridge agreement" that will enable it to stay afloat until it can agree a new four-year reform plan with its EU creditors.  Thousands of left-wing demonstrators have rallied in Athens in support of their government's proposition.   Prime Minister Alexis Tsipras's government won a confidence vote on Tuesday, with the support of 162 deputies in the 300-seat parliament.  The Athens stock exchange then fell by 4% ahead of the emergency Eurogroup meeting, which will see Finance Minister Yanis Varoufakis unveil the controversial debt proposals.  The Syriza-led government says the conditions of the €240bn (£182bn; $272bn) bailout - sweeping spending cuts and public sector job losses - have impoverished Greece.  It rejects the "troika" team - the EU, International Monetary Fund (IMF) and European Central Bank (ECB) - overseeing the bailout's implementation.  The government's proposal for overhauling its bailout comes in four parts, according to a finance ministry source widely quoted in Greek media.  Under the first part, Greece would co-operate on 70% of its bailout conditions but wants to scrap 30% - replacing it with 10 new reforms to be agreed with the Organisation for Economic Cooperation and Development (OECD). It is unclear what these would be.

At a joint press conference on Wednesday, OECD head Angel Gurria told Mr Tsipras that his organisation would "work with Greece in getting growth back not only on the books but also... to the Greek citizens".  The government's plan also includes bond swaps and a proposal to reduce the primary budget surplus target for this year to 1.49% of GDP, rather than the 3%.

Greece and its European creditors reached Friday a deal over the country's request to extend its bailout that would keep the country from falling out of the euro bloc.  An official close to discussions, who spoke only on condition of anonymity because he wasn't authorized to comment publicly, says a deal was reached between the two sides at a meeting of finance ministers in Brussels.  The official said that, as part of the agreement, Greece could "present a first list of reform measures by Monday" for the country's debt inspectors to assess. 
European creditors have insisted that any extension to loans should be accompanied by a commitment to some budget measures and reforms.  If the officials from the European Central Bank, International Monetary Fund and European Commission, say the list of measures presented Monday by Greece is acceptable, then eurozone finance meeting could discuss the issue by conference call on Tuesday.  The breakthrough in the standoff between Greece and its creditors helped global markets, with the euro and stock markets in the U.S. rising.  Friday's meeting was delayed by 4 hours as the finance ministers worked in clusters, where details of the statement were discussed.  The developments come a day after Athens requested a six-month loan extension, which would allow Greece to pay its bills and avoid an eventual bankruptcy...
A bad day for Greece from the looks of it, another 4 months of pain in a fiscal straightjacket that they have no hope of ever escaping from.  They are a long way off the levels of competitiveness required to stay in the EU and they are also now saddled with huge debt.  Logic says exit but logic doesn't include the stubborn heads of the politicians.  An exit is coming, it's just a case of when.
A total defeat for Greece actually:
1) The accord requires Greece to submit by Monday a letter to the Eurogroup listing all the policy measures it plans to take during the remainder of the bailout period, to ensure they comply with the conditions.
2) That drove ministers to make Greece hand over custody of nearly 11 billion euros in aid earmarked for stabilising its banks to the euro zone's rescue fund. "We wanted to make sure that the money for Greek bank recapitalisation is for that purpose, not for recapitalisation of the government," Dijsselbloem said.
3) "The Greeks certainly will have a difficult time to explain the deal to their voters," Schauble said.
But I cannot think why Germany has bothered. No way Greece can deliver any primary surplus, so all the next four months will do is prove that.
 

The European Central Bank has thrown Greece a lifeline to prevent Athens running out of money before crunch talks with European leaders.  The extension of emergency funding to the Greek finance sector by the eurozone’s central bankers lifted the euro and gave Greece’s prime minister, Alexis Tsipras, a stronger hand before meetings with senior officials at the leaders summit in Brussels.

Tsipras was scheduled to meet the German chancellor, Angela Merkel, in an attempt to hammer out a deal after he told her, following his election a little more than a fortnight ago, that he will lift draconian austerity measures, contravening the terms of the Greek bailout programme.  Greece has failed so far to persuade European leaders that it needs more generous loan financing to alleviate poverty and to promote growth. Talks earlier his week between eurozone finance ministers reached a deadlock after plans put forward by Athens for cheaper long-term loans were rejected...The ECB has come under pressure to allow Greece to access short-term lending facilities after it said the crisis-hit country no longer qualified for drawing on standard borrowing terms. ECB officials declined to comment, but two sources familiar with the matter told Reuters that the provision of emergency liquidity assistance (ELA) by the Greek central bank would be authorized by the ECB as a temporary expedient...  Merkel was scheduled to meet Tsipras privately on the sidelines of the one-day informal EU summit, which was meant to focus mainly on the Ukraine crisis and report back on negotiations in Minsk with the Russian president, Vladimir Putin.   Tsipras’s position appeared to weaken before the summit after figures showed a shortfall in Greek tax receipts and a steady flight of savings from the country’s largest commercial banks. Finance ministry data showed tax revenues were €3.49bn (£2.58bn) in January, well below the €4.54bn target set under Greece’s latest budget.  The grim data adds to concerns that Greece will run out of time and money before settling differences with European partners, who want Athens to stick with a debt plan that expires at the end of this month.  Greek households withheld tax payments desperately needed by the new Athens government after it rejected the last payment worth €7.2bn under the existing bailout scheme.   Greek banks have also been hit by a flight of capital to foreign-owned rivals in the runup to snap elections, which propelled Tsipras’s radical left party Syriza to the head of a coalition.

A possible Greek exit from the euro zone is not, obviously, a new concern. Three years ago, it looked like a realistic possibility until Berlin became convinced that the risks of contagion for other euro-zone countries was too great. But since then, the situation has changed dramatically. Both Greece and the euro zone are in better shape than they were in 2012 and would be better prepared to handle a Grexit.   Still, Greece's departure from the common currency union would almost certainly be more problematic than Schäuble has made it sound. Josef Ackermann, the former head of Deutsche Bank who led the debt haircut negotiations in 2012 on behalf of Greece's private creditors, continues to believe that a Greek exit "is still a very risky proposition. It would very probably lead to bank insolvencies and enormous social costs in Greece."

Euro-zone countries may have established a functioning bailout fund and made progress on a banking union scheme, but a Greek exit could attract speculators. "International investors would quickly begin asking which country might fall next," Ackermann believes. Markets could gain the impression that the currency union is a club that countries could join or leave as they liked.

Speculators could begin testing just how durable the rest of the euro zone really is and focus on countries like Portugal, Spain or Italy. "Their interest rates would increase drastically, which would thwart the policies of ECB head Mario Draghi, who would like to prevent exactly that," says Jochen Felsenheimer, CEO of the investment firm Xaia.

Greece's departure would also be just as expensive for the remaining euro-zone member states as a debt haircut because Athens would hardly be in a position to fulfill its financial obligations. Its currency would be drastically devalued and its economy would be threatened with collapse.

The ECB's tough stance has ratcheted up the pressure on Greece's new government, raising the question as to whether Athens will give in and seek to reach an agreement with its creditors or whether it will risk a damaging confrontation that could end in a Grexit.

Thus far, there has been little sign of panic on the stock markets, indicating that financial markets are, for the moment, betting on a peaceful solution.

And even a banker like Ackermann is able to see Tsipras in a positive light. "The new government, unburdened by the past as it is, could represent an opportunity to cease whitewashing the situation and to finally do away with old, incrusted structures," he says. "Nevertheless, initial measures under consideration would seem to be more designed to drive investors and companies out of the country or to discourage them from becoming involved there in the first place."... The ECB is only prepared to assist Greek banks so long as the country remains a part of a bailout program. Yet Greek banks are in vital need of liquidity from the ECB, partly because Greeks continue to withdraw money from their accounts out of concern about a banking system collapse. Indeed, the new government will only be able to prevent the looming run on Greek banks by rapidly reestablishing trust or via the introduction of controls on capital flows.

A Greek exit from the eurozone appears inevitable and Britain must insulate itself from the effects, former Chancellor Ken Clarke has warned.   The Conservative MP branded the new government in Athens “latter day Trotskyites”, and said there was no way their demands could be met. 

“I can’t see how you can sensibly avoid the Greeks defaulting and the Greeks having to leave the eurozone.   “It’s not anything to do with just the Germans, I can’t see why any other states should take a huge multi-billion pound hit again for the Greeks so they can hire more civil servants, raise their minimum wage (and) scrap all their labour market laws.”

He added: “I hope a very great deal of work is going on to minimise the impact on financial markets, on the United Kingdom - because it affects us just as much anybody else in the western world.” ...the euro is still the problem. it is not a functioning currency. basically, greek drachmas would be depreciated against the dmark to a level where greece could perform as either as a tourist hotspot or as an exporter of fine foods. the depreciation between nations is a banker's issue. greeks using drachmas in a greek economy won't see an impact. but use euros and then greece has to be up to the same economic standards as germany. thus, the greeks need to impoverish themselves more than have to. the current arrangement practically forces greece to relinquish its sovereignty. they can't even default and recover like iceland did.