Bloomberg News

Papandreou Faces Showdown on Austerity as EU Deadline Looms

June 27, 2011

(Adds Greek bonds in fifth paragraph, protest at Acropolis in 14th paragraph.)

June 27 (Bloomberg) -- Greek Prime Minister George Papandreou faces his second survival test in a week as lawmakers vote on a five-year austerity plan that must pass for the cash- strapped nation to secure more international aid.

Failure to pass Papandreou’s plan may lead to the euro area’s first sovereign default as Greece needs to cover 6.6 billion euros ($9.4 billion) of maturing bonds in August. The week, beginning with talks over creditors’ role and ending with a Sunday meeting of finance ministers meet in Brussels, will be marked by a 48-hour general strike in Greece.

With 155 votes in the 300-seat legislature, Papandreou needs to unite his lawmakers in two votes on a 78 billion-euro package of budget cuts and asset sales before Greece can tap a fifth loan payment from last year’s 110 billion-euro rescue. Ruling-party lawmaker Thomas Robopoulos said June 24 he may vote against the government, joining Alexandros Athanasiadis, who opposes plans to sell a stake in Public Power Corp SA, the former electricity monopoly.

“There is a deep awareness of the seriousness of the situation,” said Gikas Hardouvelis, chief economist at EFG Eurobank Ergasias SA, Greece’s second-biggest bank. “The program will pass as the government members of parliament are lined up behind the prime minister. Political uncertainty is out.”

Yield Climbs

Concern the sovereign debt crisis has longer to run after almost two years of attempts to stem the contagion is unnerving investors who last week pushed the euro to a record low against the Swiss franc. German bonds rose for a third consecutive week and European stocks fell for an eighth, the longest stretch of losses since 1998. Today, the yield on Greece’s 10-year notes rose 3 basis points to 16.81 percent at 10:05 a.m. in Athens.

“We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread,” billionaire investor George Soros said yesterday in Vienna. “The financial system remains extremely vulnerable.”

Papandreou has spent the past 15 days trying, and failing, to muster opposition backing for the package, while keeping his own troops in line. He appointed a new finance minister to stem defections, survived a confidence vote and outlined 5.6 billion euros of additional budget measures, including a 5 percent levy on lawmakers’ wages. On June 24, he won a pledge for a second bailout from European Union leaders provided he can deliver domestic support for the retrenchment.

Debate Begins

The first session of the three-day debate is scheduled to begin at 6 p.m. today. A vote is expected on June 29. An implementation law, which provides the technical details of how the five-year plan will be applied is also due to be discussed and approved this week by the deadline of June 30.

As Greek government officials say they may not have money past mid-July to pay wages and pensions, the country’s travails are again taking front stage in the global economy.

German Chancellor Angela Merkel’s effort to involve banks in aiding the nation is running into difficulty as her Finance Ministry rejects calls from private investors for incentives to encourage their participation in a plan to roll over maturing Greek debt. The French Treasury and banks led by BNP Paribas SA will propose this week that bondholders re-invest 70 percent of their Greek debt maturing in the next three years, three people familiar with the plan said yesterday.

Charles Dallara, managing director of the Institute of International Finance, will hold talks with banks in Rome today led by Vittorio Grilli, director general of the Italian Treasury, IIF spokesman Frank Vogl said. Grilli is also the head of the EU’s Economic and Financial Committee, which prepares the work of EU finance ministers.

Chinese Support

Europe won a vote of confidence from Chinese Premier Wen Jiabao, who said during a weekend trip to the continent that China will remain “a long term investor in Europe’s sovereign debt market.”

Ramping up the pressure on Papandreou and his lawmakers, unions, traditional allies of his socialist Pasok party, are holding their fourth general strike. Beginning at midnight, the 48-hour strike will affect government services, flights and public transport. For the past week, workers at Public Power have held rolling 48-hour strikes, leading to power cuts around the country.

Acropolis Protest

Early today, members of the Communist Party of Greece draped a banner reading “The People Have the Power: Never Surrender” in English and Greek over the walls of the ancient Acropolis citadel in Athens, chanting slogans against the austerity measures. Tourists took photos of the peaceful demonstration.

“Passage of the legislation may be the comparatively easy part,” said Jens Bastian, a visiting economist at Oxford University, in England, who believes Papandreou has the support to win the votes this week and may also receive backing from some opposition lawmakers as well. “Implementation will be severely challenged by different constituencies and thus risks being delayed or sabotaged.”

Implementing more austerity measures threatens to deepen a three-year recession and complicate efforts to boost government revenue. forecasts Greek gross domestic product will shrink 3.8 percent this year, according to a report from EU and IMF inspectors in June after contracting 4.4 percent last year. The nation’s debt load will peak at 166 percent of GDP next year, and is already the biggest in the euro-region’s history.

Lobbying Lawmakers

Evangelos Venizelos, named finance minister by Papandreou on June 17, said he’d speak to the two lawmakers threatening to withhold their support. On June 23 he met with unions at the power company, which has prompted the opposition of lawmaker Athanasiadis, whose Komotini, northern Greek constituency counts Public Power as one of its biggest employers.

“I cannot see why anyone would have supported Papandreou last Tuesday and then vote against the package” this week, said David Mackie, London-based chief European economist at JPMorgan Chase & Co.

Apart from state asset sales to reduce debt and levies ranging from 1 percent to 5 percent on wages, Papandreou’s plan includes higher taxes on restaurants and bars, higher heating- oil taxes and lowering the tax-free threshold to 8,000 euros from 12,000 euros presently. Greek newspaper To Vima calculated the additional burden for an average Greek family of four at 2,795 euros a year, about the same as one month’s income.

Papandreou Popularity

Papandreou’s Pasok party now trails New Democracy, the biggest opposition bloc, with the latest opinion poll giving Pasok 20 percent of voter preferences to 21.4 percent for New Democracy. ND leader Antonis Samaras has defied calls from EU leaders to support the package. While he says he backs the goals of the plan, he insists the package should be renegotiated to drop tax increases in favour of measures to boost growth.

“Samaras is trying to appear playing hardball with the Papandreou government in Athens but he risks holding the short straw at the European level if he insists on continued intransigence,” said Bastian.

Papandreou said in Brussels on June 24 that he believed his lawmakers knew what was at stake.

“We all feel the great sense of responsibility we have first of all to the Greek people and continuing on a difficult path, but I would say a path which is much better than the alternative path of defaulting,” he said.

--With assistance from Natalie Weeks and Marcus Bensasson in Athens, Jonathan Stearns in Brussels, Francois De Beaupuy in Paris, Gabi Thesing in Basel, Zoltan Simon in Budapest and Zoe Schneeweiss in Vienna. Editors: Andrew Davis, James Hertling.

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net

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


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