Bloomberg News

Papandreou Seeks to Turn Budget Enforcer as Violence Flares

June 30, 2011

(Updates with vote commencement in 2nd paragraph. See EXT4 for more on Europe’s sovereign-debt crisis.)

June 30 (Bloomberg) -- Greek Prime Minister George Papandreou may struggle to persuade investors he can implement a $112 billion austerity plan as Parliament votes on it in the teeth of violent street protests.

Having approved a bill yesterday setting out his strategy for budget cuts, lawmakers have just started voting in another ballot that Papandreou must win to start executing measures ranging from tax increases to asset sales. That may be easier than inflicting the plan on an economy mired in recession whose population is already enduring an income squeeze to curb the nation’s record budget deficit.

Protests may resume later after a general strike and crowds of more than 20,000 people paralyzed central Athens for the past two days in a standoff focused on Parliament as lawmakers deliberate on Papandreou’s proposals. While approval today would pave the way for Greece to secure a fifth tranche of money from the European Union to prevent a default, the yield on the country’s two-year bond is still above 26 percent.

“There is a real risk that, given the political problems, given the process, that at some stage it’s the Greeks who give up on the program,” Andrew Balls, Pacific Investment Management Co.’s head of European portfolio management, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “The EU partners are spectators when it comes to the Greek political dynamics.”

Default Risk

The cost of insuring Greek sovereign debt rose 33 basis points today to 1,978 basis points, according to CMA prices for credit-default swaps. That signals an 82 percent probability the nation will fail to meet its commitments within five years. The yield on the two-year Greek government bond was down 6 basis points at 26.763 percent.

The road in front of Parliament reopened to traffic today after an overnight cleanup of the area, which had been strewn with rubble used to pelt riot officers. A repeatedly torched van nearby had been removed, though the shell of a burnt-out newspaper kiosk remains. The protest campsite of so-called “indignants” is still in place in the center of the square facing Parliament.

Protest Plans

ADEDY, Greece’s largest public-sector labor union, announced plans to hold a rally at 7:30 p.m. today. “The struggle of the workers will continue and escalate,” it said in an e-mailed statement. Violence scotched the union’s plans to march on Parliament yesterday.

Lawmakers yesterday needed the protection of riot police who frequently deployed tear gas in violent clashes with hooded protesters. A fire at the Hellenic Post Office, on the ground floor of the building housing the finance ministry opposite the legislature, was doused by fire fighters. Police said 31 officers and 30 protesters were injured.

Culture and Tourism Minister Pavlos Yeroulanos said today that the scenes of violence shouldn’t deter visitors. He said that no other cities were affected and that transportation and sites are operating normally now.

“These events, although unfortunate, were local and do not represent in any way everyday life in the city,” Yeroulanos said in an e-mailed statement. “Visitors in Athens continue to enjoy a secure and tranquil environment and a very vibrant cultural experience.”

Tax Burden

The clashes underscore the challenge Papandreou faces in meeting EU demands for imposing further austerity on an electorate already balking at a wave of budget cuts introduced last year. Greek newspaper To Vima calculated the additional burden for an average family of four at 2,795 euros ($4,034) a year, about the same as one month’s income.

The premier prevailed in yesterday’s ballot by 155 votes to 138, a wider margin than last week’s confidence poll, as some opposition lawmakers abstained rather than hinder the legislation.

“The key underlying risk remains, namely, there is a solvency gap that will require more than just fiscal consolidation and a privatization plan,” said Antonio Garcia Pascual, chief southern European economist at Barclays Capital.

Under the terms of the new austerity plan, Papandreou has pledged to find buyers for state assets worth 50 billion euros and impose levies ranging from 1 percent to 5 percent on wages. He also plans 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.

Revenue Shortfall

Papandreou has already struggled to implement a first bailout agreed in April last year as tax revenue persistently fell short of targets. That sparked a renewed selloff in the country’s bonds in April as concern mounted a default was inevitable unless a second rescue was negotiated.

European officials are now racing to prepare a second bailout package that could help Greece through until 2014 and have sought participation from the region’s banks.

Financial institutions considering a roll-over of their Greek bond holdings are showing “growing interest” in a possible debt buyback, Charles Dallara, managing director of the Institute of International Finance, said yesterday at a meeting with three reporters in Istanbul.

Euro region finance ministers meet in Brussels on July 3 and again on July 11.

“We still expect government debt to remain stubbornly high over the coming years, suggesting that the government may still be unable to borrow from the markets when any bailout package ends,” said Ben May, European economist at Capital Economics Ltd. “The upshot is that any market rally in response to the government’s victory may prove to be fairly short-lived.”

--With assistance from Maria Petrakis, Natalie Weeks, Eleni Chrepa and Paul Tugwell in Athens and Andrew Davis in Rome. Editors: Craig Stirling, John Fraher

To contact the reporters on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net; Tom Stoukas in Athens at astoukas@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net


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