Bloomberg News

Papandreou Wins Property Tax Vote to Meet Rescue Aid Target

September 28, 2011

(Updates with comments from Merkel starting in third paragraph, bonds in fifth paragraph, strikes in 13th.)

Sept. 28 (Bloomberg) -- Greek Prime Minister George Papandreou won parliamentary backing for a property tax to meet deficit-reduction targets required to avoid default, prompting an offer of support from German Chancellor Angela Merkel.

Papandreou’s Socialist Pasok party won the vote in Athens late yesterday by 155 to 142 after Finance Minister Evangelos Venizelos told Greeks they face economic collapse if they don’t plug a budget gap that is exceeding the target set in a bailout, putting an 8 billion-euro ($11 billion) aid payment due next month at risk.

“We want a strong Greece in the euro area and Germany is ready to offer all kinds of help that is needed,” Merkel told reporters at a joint briefing with Papandreou immediately after the vote. “I have heard so far that Greece is ready to meet the conditions” set by the International Monetary Fund, European Central Bank and the European Commission. “We will discuss in great detail how we can be of help here.”

Concern that a potential default in Greece could damage Europe’s core countries and plunge the global economy into recession dominated weekend talks of policy makers, investors and bankers in Washington, where the IMF and World Bank held their annual meetings. President Barack Obama underscored the urgency when he said Sept. 26 that European governments are “trying to take responsible actions, but those actions haven’t been quite as quick as they need to be.”

Bond Yields

The yield on 10-year Greek government bonds fell 4 basis points to 23.27 at 12:30 p.m. in Athens today and the two-year note yield climbed 38 basis points to 70.43 percent.

Greek bonds have tumbled in recent weeks and credit insurance has soared, putting the chance of default at more than 90 percent, as Papandreou struggled to rein in the deficit and a recession deepened in its third year.

“Implementation of the measures is the biggest challenge for the government as the trade unions and parts of the civil service will mount significant resistance, raising the risk of inertia and inaction,” Wolfango Piccoli, an analyst in London at Eurasia Group, said before the vote.

The property tax was part of a package of cuts announced earlier this month after officials from the European Union and IMF told Greece it wasn’t meeting the terms of a May 2010 rescue.

Merkel’s Greek Interview

Merkel, in an interview with Greek broadcaster NET posted on her party’s website last night, signaled policy makers may review the terms of Greece’s second bailout after the team of inspectors finishes the latest review of the country’s finances.

Greece’s “numbers in September, as it now seems, were again different from what we expected under the program,” Merkel said, when asked whether the second Greek bailout agreed by European leaders on July 21 will be revised.

“We must now await what the troika, that is the expert mission, find out and tells us: do we need to renegotiate or don’t we need to renegotiate?” Merkel said, according to the interview transcript. “What we would like the most, of course, is that the numbers stay as we know them. But I can’t pre-empt the outcome of the troika.”

Venizelos said yesterday he expected approval of the next loan tranche “in time.” Papandreou dined with Merkel in the German capital as lawmakers in Athens voted on the tax and also ratified an upgrade of the 440 billion-euro bailout fund.

Taxi Strike

Public transportation workers and taxi drivers are holding a fourth 24-hour strike in Athens today and staff in municipalities walked-off the job from 11 a.m. to the end of the day in protest of the new measures.

The state budget deficit in the eight months to the end of August widened 22 percent to 18.9 billion euros, more than the target of 18.1 billion euros for the period. Greece has pledged to reduce its general government deficit to about 7.5 percent of gross domestic product this year from 10.5 percent in 2010.

The property levy, to be collected via electricity bills, will provide an annual yield of 1.1 percent of GDP. It will generate as much as 1.8 billion euros, according to Eurobank EFG.

Venizelos also announced an additional 20 percent wage cut, on top of 15 percent for the civil service and 25 percent in the wider public sector. Pensions are being reduced 4 percent on average, in addition to previous cuts of 10 percent. A lowering of the tax-free threshold to 5,000 euros will mean higher taxes for all Greeks.

More than 74 percent of 1,002 Greeks polled by Rass for To Paron newspaper opposed the property tax. The poll also showed that 59 percent believed Papandreou’s government won’t be able to avert a default. The survey had a 3.1 percentage point margin of error. Papandreou’s government trails the opposition party in all polls.

Unions have called general strikes for Oct. 5 and Oct. 19, while public-transit companies including the Athens subway have held strikes over the past few days to oppose the measures.

--With assistance from Eleni Chrepa in Athens. Editors: James Hertling, Maria Petrakis

To contact the reporter on this story: Natalie Weeks in Athens at nweeks2@bloomberg.net; Marcus Bensasson in Athens at mbensasson@bloomberg.net

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


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