June 16 (Bloomberg) -- Greek Prime Minister George Papandreou’s called on his allies in parliament to back his austerity plans that aim to stave off the euro region’s first default.
“We must rise to the occasion and realize how dramatic the situation is and work with a united spirit to face the crisis,” Papandreou told lawmakers in Athens today. “Our answer to the storms around us is stability and to continue our course, with our planned changes and targets.”
Papandreou did not give any details of the government reshuffle he announced last night after his bid to form a unity government with the leading opposition party failed. Defections by key allies fueled investor concern that his grip on power was slipping and chances of default increasing, roiling global financial markets.
The yield on Greece’s 2-year bond topped 30 percent for the first time and the cost of protecting Greece against default climbed 280 basis points to a record 2,050 basis points, according to prices compiled by CMA. The euro fell to a three- week low earlier in the day after sliding the most in more than a month yesterday. The Stoxx Europe 600 Index fell 0.5 percent today to 266.73.
The political turmoil came as European Union talks on forging a new bailout to prevent the first euro-area default stalled. EU Economic and Monetary Affairs Commissioner Olli Rehn said in an interview that he was confident an agreement would be reached to allow Greece to receive its next bailout payment.
Failure to secure the aid would push Greece to the brink of default, with the country’s needing the funds to cover 6.6 billion euros ($9.3 billion) of maturing bonds in August.
“The alternative to compromise would be outright default, which would be a disaster for everyone, including the Greeks and the rest of the region,” said David Mackie, London-based chief European economist at JP Morgan Chase & Co. “It would lead to a collapse in the Greek banking system and the economy, and would likely generate a significant financial crisis across the region.”
Papandreou sought to reassert his authority in a televised address last night hours after police used tear gas to break up protests in central Athens and media reported he was in talks to step down in favor of a unity government. He said he would reshuffle his Cabinet and then call a confidence vote in parliament.
Two members of his parliamentary group resigned today, prompting lawmakers from his Pasok party to demand an emergency meeting, which has delayed the announcement of a new Cabinet. Papandreou told lawmakers that the country needs unity more than ever and that he had faith that his allies would stand with him. The meeting began at about 7 p.m. in Athens after his speech.
Papandreou will be able to replace the two with other party members, so their exit won’t affect his parliamentary majority, which shrunk to five seats after the defection this week of two other allies.
Finance Minister George Papaconstantinou, who shepherded Greece’s 110 billion-euro bailout last year, is under attack for the new round of budget cuts and may be replaced, Greek media have reported. Lucas Papademos, the former European Central Bank vice president and now an adviser to Papandreou, is touted as a substitute.
Papandreou’s options are narrowing after attempts to gain opposition support for the austerity plan failed, party allies turned against him and public anger grew. The premier needs to clinch a vote on a 78 billion-euro five-year package of budget cuts and state-asset sales by the end of the month to ensure the country gets a new aid package needed to prevent a default.
“It is certainly regrettable that the efforts to build a national unity government failed yesterday,” Rehn said in the interview today in Brussels. “We supported those. And as it was possible in Ireland and in Portugal, it is difficult to see why this cannot be possible in Greece.”
More than 20,000 people rallied yesterday in Athens against wage reductions and tax increases as lawmakers debated the budget cuts and asset sales. Ports, banks, hospitals and state- run companies were paralyzed by strikes.
The political shakeup comes a week before a meeting in Brussels of European leaders, who had pledged to sign off on a new aid plan for Greece to plug a funding shortfall of about 30 billion euros next year. Under the original bailout, Greece was due to return to markets in 2012. With its 10-year bond yielding almost 18 percent, more than twice the level at the time of last year’s rescue, Greece has abandoned that plan and was seeking additional aid from its European partners.
EU leaders are under further pressure to reach an agreement on a new three-year aid plan after the International Monetary Fund threatened to withhold its share of a 12 billion-euro bailout payment due this month until the EU figures out how to close Greece’s funding gap, which may reach 90 billion euros over the next three years.
The IMF is “ready to continue our support for Greece,” the organization said in a statement in Washington today.
“We have been in very close contact with the IMF,” Rehn said. “I’m confident we can conclude the review in the coming days, by Sunday, and we can thus take the decisions on the disbursement respectively in the two organizations, so this next disbursement can take place in early July.”
--With assistance from Marcus Bensasson and Eleni Chrepa in Athens, Jonathan Stearns in Brussels. Editors: Andrew Davis, Jennifer Freedman
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