Germany warns Greece it must back bail-out

Germany has threatened to halt financial aid to Greece unless a new government commits to the terms of the country's bail-out agreements.

Ministers in Berlin warned that they would withhold international aid to Greece in a move that could trigger a fresh, damaging countdown to default in Athens.

Amid escalating anger in Berlin over the anti-euro backlash following elections in Greece, the country will receive a euros 4.2bn (pounds 3.4bn) cash injection today (Thursday) as part of its euros 130bn March bail-out. Athens, where the leader of the newly powerful Syriza party has vowed to reject the bail-out, is due to repay a euros 3.3bn bond next Friday.

But Germany's foreign minister, Guido Westerwelle, said Greece must "recognise what's going to happen if it repeals agreements which have been made".

Speaking at a conference that, ironically, was marking Europe Day, Mr Westervelle said: "If Greece ends the reform process it has undertaken, then I can't see that the respective tranches [of aid] can be paid out."

Wolfgang Schaeuble, Germany's finance minister, suggested that he was ready for Greece to leave the euro. "If Greece decides not to stay in the eurozone, we cannot force Greece," he said.

Stock and bond markets lurched at the prospect of another roller-coaster effort to avoid a Greek default.

Traders were already rattled by the expectation that Madrid will unveil an obligatory euros 30bn bank recapitalisation programme tomorrow. The Ibex fell 2.8pc, lead by a big sell-off of the main banks. Spanish banks, which are being crippled by the falling value of their property loans, are already struggling with the euros 54bn recapitalisation ordered by Prime Minister Mariano Rajoy in February. Analysts said Spain's Bankia is likely to need additional funding from the state.

The yield on Spain's benchmark 10-year bond rose above the 6pc danger level. Italian bond yields also jumped as fears of contagion spread. The UK, meanwhile, benefited as gilts were pushed to a new record low on safe-haven demands.

Other European bourses held firm due to data showing a surge in Germany's export market. Its trade surplus grew from euros 14.9bn to euros 17.4bn in March. But the euro fell below $1.30 and American markets fell 1pc on opening.

Europe's economic affairs commissioner, Olli Rehn, appealed for calm. "The [Greek] payout will take place because it has already been approved," he insisted.

But officials in Brussels said Germany and Finland were pushing for all the tranche payments to be suspended until Greece had reaffirmed its commitment to its bail-out terms. Traders fear that Germany, despite being Europe's paymaster, is losing its whip hand because it clearly has more to lose than Greece if the eurozone collapses.

A Greek default could trigger a shock wave of bank collapses and debt defaults across Portugal, Spain and Italy. Despite the determined efforts by chancellor Angela Merkel not to back eurozone debt, Germany has a vast exposure to sovereign bonds through the Bundesbank and the ECB.

Fears of contagion are again leading to a seizure in the markets, with investors reluctant to lend to sovereigns or banks. The freeze has been eased by the ECB's euros 1trillion cheap loan programme, but experts said the impact of the LTRO has now worn off.