Papandreou Calls Confidence Vote on New Government in Bid for More EU Aid

Greek Prime Minister George Papandreou will reshuffle his Cabinet and seek a confidence vote today, battling to control a shrinking majority and push through austerity measures demanded by international lenders.
Papandreou sought to reassert his authority in a televised address last night hours after police used tear gas to break up protests in central Athens and media reported he was in talks to step down in favor of a unity government. Thousands remained outside Parliament late into the evening, with police estimating the crowd at 8,000 people at 10:20 p.m.
The political turmoil came as European Union talks on forging a new bailout to prevent the first euro-area default stalled. The impasse over the aid formula and speculation that a government shakeup would disrupt passage of budget cuts and asset sales sent Greek bonds and the euro plunging yesterday.
“If the no confidence motion fails, the market reaction is just the beginning,” Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London, wrote in a note. “Then Armageddon scenarios come into play, which include default and potentially the whole contagion scenario plays out.”
The yield on two-year Greek notes exceeded 28 percent for the first time and rates on 10-year bonds gained 35 basis points to 17.73 percent. The cost of protecting Greece against default climbed 149 basis points to a record 1,754 in London, according to prices compiled by CMA.

Markets Slide

The euro fell the most in more than a month, declining 1.9 percent against the dollar, and U.S. stocks slid the most in more than two weeks. National Bank of Greece SA had its biggest decline in three months. BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s biggest lenders, declined after Moody’s Investors Service placed their credit ratings on review to scrutinize their holdings of Greek debt.
Finance Minister George Papaconstantinou, who shepherded Greece’s 110 billion-euro ($156 billion) bailout last year, is under attack for the new round of budget cuts and may be replaced, Greek media has reported. Lucas Papademos, the former European Central Bank vice president and now an adviser to Papandreou, is touted as a substitute.
“Our duty is to the nation, not to political parties,” Papandreou said in comments televised live on state-run NET TV. “Tomorrow I will form a new government and immediately afterwards seek a vote of confidence in Parliament. It is a time for responsibility.”

Budget Cuts

Papandreou’s options are narrowing after attempts to gain opposition support for the austerity plan failed, party allies turned against him and public anger grew. The premier needs to clinch a vote on a 78 billion-euro five-year package of budget cuts and state-asset sales by the end of the month to ensure the country gets a new aid package needed to prevent a default.
“The prime minister’s attempts to regain the political initiative are far from assured of success,” said Martin Blum, co-head of asset management at Ithuba Capital in Vienna. “He has seemingly further weakened himself politically, whilst he risks further defections post reshuffle. The question of whether he can get the fiscal package through parliament remains open.”
More than 20,000 people rallied yesterday in Athens against wage reductions and tax increases as lawmakers debated the budget cuts and asset sales that are conditions of the new aid. Ports, banks, hospitals and state-run companies were paralyzed by strikes, while a Papandreou ally said he won’t support the austerity measures and another bolted his Socialist Party. Papandreou held a six-seat edge in the 300-member legislature before the defections.

‘Playing Hardball’

“Papandreou is playing hardball with opposition parties and his own by asking for a confidence vote that’s not needed,” said Wolfango Piccoli at Eurasia Group. “After many months of dithering and back-pedaling, Papandreou is now fundamentally a spent political force with almost no cards left in his hands.”
Greek opposition leader Antonis Samaras last night accused Papandreou of backtracking on an offer to form a national unity government and called on the premier to demonstrate he can govern, or call early elections.
The political shakeup comes a week before a meeting in Brussels of EU leaders, who had pledged to sign off on a new aid plan for Greece to plug a funding shortfall of about 30 billion euros next year. Under the original bailout, Greece was due to return to markets in 2012. With its 10-year bond yielding almost 18 percent, more than twice the level at the time of last year’s rescue, Greece has abandoned that plan and was seeking additional aid from its European partners.

Funding Gap

EU leaders are under further pressure to reach an agreement on a new three-year aid plan after the IMF threatened to withhold its share of a 12 billion-euro bailout payment due this month until the EU figures out how to close Greece’s funding gap, which may reach 90 billion euros over the next three years.