Bloomberg News

Papandreou Faces Confidence Vote That May Decide Greek Fate

June 21, 2011

June 22 (Bloomberg) -- Greek Prime Minister George Papandreou is facing a confidence vote in his government that may determine whether Greece becomes the first euro-area country to default.

The vote caps a week of turmoil for Papandreou, who fended off a revolt from his ruling socialist Pasok party in parliament last week. That came after the opposition rejected his call for a national unity government. The count, broadcast live on television, got under way in Athens after midnight local time. European Union leaders have insisted Papandreou secure multi- party support for austerity measures as a condition of the aid needed to avoid default as soon as next month. A vote on the fiscal plan is due next week.

“Pasok now knows it has to close ranks,” said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. “The situation is volatile. A negative vote by the Greek parliament could trigger a serious crisis in Europe.”

The International Monetary Fund, contributor of a third of the bailout money for Greece, Ireland and Portugal, has warned European leaders that a failure to take decisive action on the debt crisis risks triggering “large global spillovers.” At the same time, Papandreou is struggling to convince Greeks to accept a 78 billion-euro ($112 billion) package of state-asset sales and budget cuts, which include a “crisis levy” on wages.

While Greek bonds rose yesterday on optimism that Papandreou will win the confidence vote, he will have to go back to parliament next week to get his budget plan passed.

Bond Rebound

“Whether such a heterogeneous government can in fact implement the plan is a different question altogether,” said Miranda Xafa, senior investment strategist at Geneva-based IJPartners and former IMF board member for Greece.

The yield on two-year Greek yields, which surpassed 30 percent for the first time last week, fell 97 basis points to 27.64 percent as of 5 p.m. in London.

Papandreou, 59, now has 155 seats in the 300-seat chamber after one Pasok deputy on June 14 resigned from the party and declared himself independent in protest of the government’s economic policies. Two days later, two socialist lawmakers quit parliament, prompting Papandreou’s party to demand an emergency meeting and stoking investor concern that his grip was slipping and the chance of default growing.

Debate

In an effort to shore up political support, Papandreou on June 17 replaced finance minister George Papaconstantinou with Evangelos Venizelos, his defense minister and one-time rival for the party leadership, in a cabinet reshuffle.

Papandreou hopes to meet EU leaders at a summit later this week that will discuss a new financing package to shield Greece from record borrowing costs for as many as three years. If Papandreou survives the vote, he will seek approval in parliament next week for his five-year economic plan.

Euro-area finance chiefs, pushing Greece to pass the laws needed to cut its deficit and sell state assets, left open two days ago whether the country will get the full 12 billion euros promised for July as part of last year’s 110 billion-euro lifeline. Finance ministers will meet again July 3 to decide on Greece’s loans.

“Greece’s national unity has become a pre-requisite for our partners,” Venizelos, 54, said after his first meeting with European counterparts in Luxembourg. “It should have been the nation’s self-preservation instinct.”

‘Policy Mix’

Venizelos said EU partners required the parliament to vote through the fiscal plan as well as a bill on implementing the plan by June 30, according to an e-mailed statement from the Athens-based Finance Ministry. References to national unity pointed to the “need for a climate and atmosphere of unity and responsibility,” he said.

Defeat would embolden the opposition and could lead to elections, giving Antonis Samaras, leader of New Democracy, the largest opposition party, the opportunity the pursue his vow to renegotiate the package.

“We cannot support a further policy mix exactly in line with the first policy mix which hasn’t produced any of the results,” Notis Mitarachi, alternate head of economic policy for the opposition party, told Maryam Nemazee on Bloomberg Television. “We agree on the goals of the program but we disagree on the policy mix through which it’s implemented.”

‘Better Than Even’

Schmieding said there is “a better than even” chance Papandreou will win the vote of confidence after the reshuffle.

“Putting party stalwart Venizelos at the top of the finance ministry improves the chances that Pasok will stick together,” he said. “It is a close call.”

More than 47 percent of 1,208 Greeks surveyed by Kapa Research SA for To Vima newspaper oppose the new austerity measures and want early elections. Almost 35 percent said the package should be approved.

Unions have called strikes against the measures. The trade union at Public Power Corp SA began rolling 48-hour strikes, forcing the company to conduct scheduled power cuts to prevent a blackout.

Protests outside Parliament House are held on a daily basis, prompting leftist Syriza leader Alexis Tsipras to call the gatherings “a new lower house” of parliament. Another demonstration took place as lawmakers voted.

Papandreou has promised to call a referendum later this year on changes to the country’s political system and constitution to allay demonstrators’ concerns.

Elected in 2009, Papandreou first sought a financial rescue in April 2010 to avoid default as investors refused to finance a record budget deficit. The conditions attached to the aid have helped deepen a slump that has driven the economy into recession for a third year, lifted unemployment to 15.9 percent and fueled popular discontent and unrest.

--With assistance from Marcus Bensasson, Eleni Chrepa, Tom Stoukas and Paul Tugwell in Athens and Marco Bertacche in Milan. Editors: Matthew Brockett, Eddie Buckle

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net

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


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