Greek Prime Minister to Form New Government

Greek Prime Minister George Papandreou will form a new government on Thursday and seek a vote of confidence from his PASOK parliamentary group, he said in a televised address on Wednesday...

"Tomorrow I will form a new government, and then I will ask for a vote of confidence."

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A string of parliamentary resignations on Thursday threatened to thwart Greek Prime Minister George Papandreou's plan to reshuffle his cabinet and pass austerity measures needed to save the nation from default.

The political turmoil raised uncertainty over the Socialist cabinet's five-year plan for tax hikes, spending cuts and state property selloffs demanded by its bailout lenders, spooking investors who fear the problems will infect global markets.

Analysts said it was increasingly unclear whether Papandreou would be able to form a new governing team and get the deeply unpopular measures approved amid the political chaos, which follows nationwide strikes and violent protests in Athens on Wednesday.

"It will be very hard now to find good people to form a government now. They don't trust (Papandreou) after all the flip-flops he has made," said former finance minister Stefanos Manos. "Who will make privatisations now in all this turmoil?"

Two other Socialist deputies stepped down on Thursday in protest and will be replaced by other party members.

World stocks hit a three-month low, the euro tumbled and government bonds with top credit ratings rose as concerns intensified over the crisis, while the cost of insuring Greek debt against default hit yet another record high.

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Demonstrators today encircled the Greek parliament in Athens in an attempt to stop MPs voting on even deeper austerity measures for the debt-ridden country.

They were involved in a tense stand-off with riot police in Constitution Square as a 24-hour strike began.

The walkouts left hospitals running on emergency staff, disrupted transport and forced radio and TV news shows off the air.

Prime minister George Papandreou was attempting to push through the measures which will include higher taxes and wider spending cuts.

The government needs to pass a new 2012-2015 austerity programme worth more than £20 billion this month or face being cut off from continued funding of rescue loans from European countries and the International Monetary Fund.

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Fears of contagion from political and market turmoil in Greece sent Spanish borrowing costs to 11-year highs, in spite of a deal between the European Union and the International Monetary Fund that reduced the chance of an imminent default in Athens.

Spanish government bond yields, which move inversely to prices, jumped to highs last seen in September 2000, while Greek yields surged to fresh euro-era highs on Thursday.

The threat of a Greek default within weeks receded as international leaders overcame a hurdle to ensure Athens received bail-out loans to repay maturing debt in July.

A failure to repay this debt would trigger a default.

But the loans are conditional on the Greek parliament backing new austerity measures. In Athens, George Papandreou, prime minister, was fighting to persuade his own party, let alone the opposition, of the need to pass the measures.

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donsutherland1 said:

From CNBC:



News Headlines

IMO, Greece missed its first opportunity to use the time it received from the EU-ECB-IMF package to begin to tackle its solvency issues. Another aid package is probably more likely than not, but Greece faces some stiff political challenges ranging from an opposition that is putting future political advantage ahead of Greece's fiscal welfare and popular discontent with austerity. Were the Greek Prime Minister to fall in his "no confidence" vote, that could undermine prospects for a new round of assistance, particularly if no stable successor government could be formed in a timely fashion.

In any case, the next aid package might well be the last option before some kind of default event. Default is not yet a foregone event, but a lot will depend on whether Greece addresses its structural solvency issues. A default event would likely have some spillovers across the Euro Zone and, to a lesser extent, globally. One risk might be renewed focus on rapidly growing fiscal imbalances elsewhere, including the U.S. and Japan.

Things to look for should Greece head for default include:

1) Desperate capital conservation measures. These might include bank holidays, mandatory exchanges of domestic savings for Greek bonds (to provide finances to the government), restrictions on withdrawals, etc.
2) Efforts to launch negotiations with foreign creditors for "voluntary" resecheduling/restructuring, possibly by making rescheduled debt senior to other debt.
3) Intensifying protests that become national in scope and begin to take a material toll on economic activity.
4) The introduction of "temporary" currency-like instruments to substitute for a lack of liquidity (possibly a prelude to returning to the Drachma?) and to provide leverage in demand for additional EU/ECB assistance (as the step could be a transitory one toward reintroduction of the Drachma)
5) A broadening of tax measures aimed at capturing income e.g., taxes on export earnings (though Greece's export sector is very small)

Were Greece to default, reintroduction of the Drachma would not insulate it. The reintroduced currency would plunge in value. With only a very small export sector, the plunge would not significantly boost economic activity. Moreover, Greece would likely be unable to prevent a collapse of its banking system. Even more desperate measures than the capital controls cited in point #1 could be pursued were the banking system to collapse.

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The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” Alan Greenspan, the former chairman of the Federal Reserve, said on a “Charlie Rose” broadcast, shown on Bloomberg TV on Thursday night. He added that as a result, some American banks may be “up against the wall.”

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Greece faced power outages on Monday as employees at the main power utility began 48-hour rolling strikes to protest the company's privatization, part of austerity plans needed to avoid a national debt default.

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Europe faltered in its race to save Greece from default as finance chiefs said further aid hinged on embattled Prime Minister George Papandreou delivering budget cuts in the face of domestic opposition.

On the eve of a confidence vote that threatens to topple Papandreou, the euro area’s top economic policy makers pushed Greece to pass laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July, running into International Monetary Fund criticism for indecisiveness.

Decisions on the next payout and a three-year follow-up package were put off until next month, prolonging Greece’s fiscal agony and heightening the brinksmanship that has marked Europe’s handling of the unprecedented debt crisis. The stumble negated gains made in markets last week after Germany indicated a second Greek bailout was in the works.

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Breaking News: Greece Agrees on 5-Year Austerity Plan With EU, IMF - Reuters (Story developing)

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donsutherland1 said:

From CNBC:



The big issue remains as to whether Greece will succeed in using the time this deal/next installment of EU/IMF funding gives it to begin to tackle its structural fiscal problems.

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washunut said:

No the big issue is can Greece hold on long enough for the European banks to get healthy enough to sustain the losses they will take when it has to default.

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This is how quickly the European debt crisis devolves: Austerity, viewed by markets as saving grace for Greece just a day ago, has quickly moved into irrelevance as banks and insurers continue to find a path around default.

No doubt cutbacks are an integral part of the Greek future.

Violent street protests aside, the county’s financial standing simply won’t allow it to continue along the path of bloated government, massive public giveaways and the debt-on-top-of-debt strategy it has employed for too long.

But without some type of structural default on its current obligations, all the austerity in the world won’t make Greece’s problems go away.

“Greece and a number of other European countries cannot repay their debt. In fact they will never be able to repay their debt under current conditions because their economies are not competitive globally,” banking analyst Dick Bove at Rochdale Securities wrote in an analysis. “Therefore, these countries must, and in my judgment will, repudiate their debt.”

Indeed, looking at Greece’s onerous debt maturity schedule, it is almost impossible to imagine another alternative.

Starting with a 2.4 billion-euro repayment on July 15, Greece then has to pay, in euros: 900 million on July 19, 1.5 billion on July 20 and 1.6 billion on July 22. August doesn’t get much better, when the nation has a 1.6 billion-euro payment due on Aug. 19 and 9 billion euros due to the next day.

The main problem with default, of course, is that it will lead to a financial crisis.

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Billionaire investor George Soros said it’s “probably inevitable” that a mechanism will be put in place to allow weaker economies to exit the euro.

“There’s no arrangement for any countries leaving the euro, which in current circumstances is probably inevitable,” Soros, 80, said at a panel discussion in Vienna yesterday on whether liberal democracy is at risk in Europe. “We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread. The financial system remains extremely vulnerable.”

“I think most of us actually agree that” Europe’s crisis “is actually centered around the euro,” said Soros. “It’s a kind of financial crisis that is really developing. It’s foreseen. Most people realize it. It’s still developing. The authorities are actually engaged in buying time. And yet time is working against them,” he said.

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A deeper-than-expected recession caused Greece's central government deficit to widen by almost one third in the first half of the year, widely missing an interim budget target under the country's bailout plan, the finance ministry said on Monday...

The budget data refer to the state budget deficit which excludes local authorities and social security spending and does not coincide with the general government shortfall -- the benchmark for the EU's assessment of Greece's fiscal progress.

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European Union leaders are poised to hold an emergency summit after finance ministers acknowledged for the first time that some form of Greek default may be needed to cut Athens' debts and stop contagion to Italy and Spain.

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