Bloomberg News

Papandreou Reshuffle Fuels Allies Dissent as Markets Tumble

June 16, 2011

June 16 (Bloomberg) -- Greek Prime Minister George Papandreou’s decision to reshuffle his Cabinet and demand his allies vote confidence in his government fueled dissent within his Socialist ranks and roiled financial markets.

The yield on Greece’s 2-year bond topped 30 percent for the first time on concerns Papandreou’s grip on power was slipping, threatening passage of a new austerity plan aimed at securing a second aid package and avoiding the euro-region’s first default. The resignation today of two members of Papandreou’s parliamentary group, prompted Socialists lawmakers to demand an emergency meeting with the premier.

The political turmoil came as European Union talks on forging a new bailout to prevent the first euro-area default stalled. The impasse over the aid formula and speculation that a government shakeup would disrupt passage of budget cuts and asset sales sent Greek bonds and the euro plunging. EU’s Economic and Monetary Affairs Commissioner Olli Rehn said in an interview that Greece would receive its next bailout payment.

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. He has yet to announce the details of the government shakeup.

‘Armageddon Scenario’

“If the no confidence motion fails, the market reaction is just the beginning,” Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London, wrote in a note. “Then Armageddon scenarios come into play, which include default and potentially the whole contagion scenario plays out.”

Greek confidence debates typically take three days with the ballot at midnight, meaning the vote isn’t likely before the evening of June 19.

Greece’s 10-year bonds declined for a ninth day, with the yield rising 22 basis points to 17.9 percent. The cost of protecting Greece against default climbed 129 basis points to a record 1,899 in London, indicating an 81 percent chance that Greece will default, according to prices compiled by CMA.

The euro fell to a three week low of $1.4122 after it slid the most in more than a month yesterday. The benchmark Stoxx Europe 600 Index fell 0.9 percent today to 265.59 as of 12:10 p.m. in London.

Papaconstantinou, Papademos

Finance Minister George Papaconstantinou, who shepherded Greece’s 110 billion-euro ($156 billion) bailout last year, is under attack for the new round of budget cuts and may be replaced, Greek media has reported. Lucas Papademos, the former European Central Bank vice president and now an adviser to Papandreou, is touted as a substitute.

Defense Minister Evangelos Venizelos may be moved from his post, Kathimerini newspaper said today, without citing anyone. Papandreou may add as many as three ministers that aren’t members of parliament to his Cabinet, including Papademos, the Athens-based daily said. The new Cabinet will have 15 ministers and the same number of deputy ministers, the newspaper said.

“Our duty is to the nation, not to political parties,” Papandreou said in comments televised live on state-run NET TV. “I will form a new government and immediately afterwards seek a vote of confidence in Parliament. It is a time for responsibility.”

Options Narrowing

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.

Rehn said Greece faces “a very serious moment.”

“It is certainly regrettable that the efforts to build a national unity government failed yesterday,” Rehn said in a an interview 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, which is in much deeper difficulties than Ireland or Portugal.”

More than 20,000 people rallied yesterday in Athens against wage reductions and tax increases as lawmakers debated the budget cuts and asset sales that are conditions of the new aid. Ports, banks, hospitals and state-run companies were paralyzed by strikes, while a Papandreou ally said he won’t support the austerity measures and another bolted his Socialist Party. Papandreou held a six-seat edge in the 300-member legislature before the defections. The resignations today shouldn’t affect h is majority as he will be able to replace them with new Socialist deputies.

Unity Government

Greek opposition leader Antonis Samaras last night accused Papandreou of backtracking on an offer to form a national unity government and called on the premier to demonstrate he can govern, or call early elections.

The political shakeup comes a week before a meeting in Brussels of EU 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.

Aid Package

EU leaders are under further pressure to reach an agreement on a new three-year aid plan after the IMF 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.

Rehn said he is “confident” Greece will receive the next tranche of aid in early July, and that he received assurances from the IMF about its participation.

“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.”

Euro area finance ministers remain divided over a German- led push for bondholders to shoulder part of the cost of the new aid with European Central Bank officials warning that such a move might constitute a default. Finance chiefs failed to reach an agreement at a meeting in Brussels on June 14 and announced they would convene again on June 19 in Luxembourg, a day earlier than planned, in an effort to wrap up a package before the summit on June 23-24.

--With assistance from Marcus Bensasson and Eleni Chrepa in Athens, Jonathan Stearns in Brussels. Editors: James Hertling, Andrew Davis

To contact the reporters on this story: Maria Petrakis at mpetrakis@bloomberg.net; Natalie Weeks in Athens at nweeks2@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net


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