Skip to comments.Greece: Government struggles after bailout bombshell
Posted on 11/01/2011 10:01:47 PM PDT by bruinbirdman
Prime Minister George Papandreou faced calls from within his own party to step down on Tuesday after he threw the nation's eurozone membership into jeopardy by calling a referendum on a bailout package agreed only last week.
A leading Pasok MP quit while two others said Greece needed a government of national unity followed by snap elections, which the opposition also demanded.
The leaders of France and Germany scrambled to limit the damage to the wider eurozone, and European politicians expressed incredulity at an announcement that caught everyone by surprise - including Finance Minister Evangelos Venizelos.
"It's difficult to see what the referendum is going to be about. Do we want to be saved or not? Is that the question?" asked Swedish Foreign Minister Carl Bildt.
Business executives in Greece expressed despair at how the country was being run and markets speculated on whether Italy will be the next eurozone country to slide into a debt crisis.
Jean-Claude Juncker, who chairs meetings of eurozone finance ministers, refused to rule out a Greek debt default.
"The Greek prime minister has taken this decision without talking it through with his European colleagues," he said in Luxembourg.
Asked whether a Greeks "no" vote would mean bankruptcy for Greece, Juncker responded: "I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greeks people will vote on."
Papandreou, whose party has already suffered several defections as it pushes waves of austerity measures through parliament, said he needed wider political backing for the budget cuts and structural reforms demanded by international lenders.
But his problems deepened dramatically after his announcement on Monday. A cabinet meeting is due to held at 6pm.
Pasok MP Milena Apostolaki quit the parliamentary group on Tuesday, reducing Pasoks strength to just 152 seats out of 300 deputies before a vote of confidence.
"It's my duty to resist this wrong political choice which divides in an effort to replace the popular mandate and threatens the country's viability," Apostolaki wrote in a letter to the parliamentary speaker.
"These are crucial moments and citizens need to be represented by members of parliament they have elected. Therefore ... I am becoming independent."
Fellow Pasok MP Vaso Papandreou demanded a new government to ensure Greece receives the 130bn-euro rescue deal agreed at a eurozone summit only last week.
"I am calling on the President of the Republic to convoke political leaders with the object of forming a government of national unity to safeguard the aid package decided on October 27 and call elections immediately afterwards," said Papandreou.
Papandreou did not even inform Finance Minister Evangelos Venizelos that he was going to announce the referendum on the latest EU aid deal, a Greek government official said.
"Venizelos had no idea about the referendum. All he knew about was the vote of confidence," the official told Reuters on condition of anonymity.
'They must be crazy'
French President Nicolas Sarkozy will call German Chancellor Angela Merkel on Tuesday, his office said, while emotions ran high in Greece itself about the referendum idea.
"They must be crazy ... this is no way to run a country," said the senior executive of one of Greece's biggest firms, speaking on condition of anonymity.
Elsewhere in the eurozone, politicians complained Athens was trying to wriggle out of the bailout package, concerned not so much about the fate of Greece as the possibly dire consequences for the entire currency union of the referendum.
Ireland, which itself took a bailout, attacked Papandreou's idea.
"The summit last week was to deal with the uncertainty in the eurozone...and this grenade is thrown in just a few short days later," European affairs minister Lucinda Creighton said.
"Legitimately there is going to be a lot of annoyance about it," she told Reuters.
The Greek opposition demanded a snap election and financial markets, which had calmed down after eurozone leaders agreed the second Greek bailout, took Papandreou's bombshell badly.
Shares in banks dived, investors fled to the safety of German bonds and Italian borrowing costs climbed despite European Central Bank action. Investors speculated that Italy might follow a similar path.
On the markets, players scurried for safer investments, hammering stocks and punishing the euro.
"The referendum is a bad idea with a bad timing. The post-summit rally is over," said Lionel Jardin, head of institutional sales at Assya Capital, in Paris.
The FTSEurofirst 300 index of top European shares was down almost four percent, due not only to the possibility of a disorderly Greek default but chaos surrounding the eurozone's attempts to stop the debt crisis spreading to more significant economies such as Italy.
Eurozone banks exposed to Greece and Europe's bigger, troubled economies, suffered particularly. Shares in France's Societe Generale tumbled 17 percent and Credit Agricole was down almost 12.5 percent.
Andrew Lim, banking analyst at Espirito Santo in London, said that a Greek "no" vote could trigger a "hard default", forcing banks to take losses of about 75 percent on their Greek sovereign bonds and raising the threat of a systemic risk.
"If we get a hard default in Greece, it will exacerbate the situation with Italy and Spain. It just increases the problem of Italy going down the same route, and that's the real risk," Lim said.
Investors sold off bonds issued by Italy and Spain -- two major economies with debt problems which would be much tougher to rescue than Greece, one of the eurozone's smallest members.
Traders said that prompted the ECB to step in and buy the bonds of both countries as implied Italian borrowing costs hit a three month high around 6.26 percent.
On currency markets, the euro fell over one percent versus the dollar and yen. "The Greek referendum is a real curve ball. Nobody saw it coming and it injects a lot of uncertainty," said Steven Saywell, head of FX strategy at BNP Paribas.
In Athens, the conservative opposition leader called for snap elections. "Elections are a national necessity," conservative leader Antonis Samaras told reporters.
Germans on the streets of Berlin expressed exasperation with the entire euro project.
"All I understand is that the Greeks keep causing us problems. We'd be better off without the euro," said Bert Kuehn as he delivered rolls to a bakery.
Analysts said the latest opinion poll showed a majority of Greeks took a negative view of the bailout deal.
The renewed uncertainty is likely to be an embarrassment for G20 leaders meeting in France this week trying to coax China into throwing the euro zone a financial lifeline.
Greece is due to receive an 8bn euro tranche in mid-November, but that is likely to run out during January, around the time of the referendum, leaving the government with no funds if there is a "no" vote.
A survey carried out on Saturday showed that nearly 60 percent of Greeks viewed the agreement on the bailout package as negative or probably negative.
Some capitulations after surprise at seeing unintended consequences for Italy and Spain?
An interesting chronology of todays Greek government is here:
"political correspondent, George Gilson, filed his analysis of the day's developments. Gilson says that with Papandreou's "own deputies ... axing away at his parliamentary majority, [this is] casting serious doubts on whether the government can survive until Fridays vote of confidence".
Could someone explain what the dangers are in letting these socialist parasites go under?
It is an interesting political manuver.
1. the Greeks are screwed so they turned the equation upside down and screwed the EU.
2. If the no confidence vote passes then the referendum fails and no politician wants to deny the opportunity of referendum. (the EU is freaking out because if voting mattered they would never have allowed it...)
3. The PM is a sacrificial lamb.
4. The whispers are a) criminal indictments and prosecutions of those who gamed the euro transition and the greek bond inflation b) nationalizing any foreign (german) investments.
5. The only way out without EU legislators selling apples on the streets is by caving in to the Greeks.
6. This is battle of marathon, Thermopalye, and Crete 1941 all rolled up into one package.
Think magician. Greece is the misdirection the REAL problem is at the ECB and the EU parliament.