Greek PM convinces cabinet to push referendum deal ahead

9:16 PM ahead, cabinet, convinces, Greek, referendum No Comments

ATHENS — Greek Prime Minister George Papandreou fought off a barrage of criticism to win the backing of his cabinet Wednesday to push ahead with a referendum the government said would take place as soon as possible on a European Union debt bailout deal.

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Some of his party lawmakers called for him to quit for jeopardizing Greek euro membership with his shock decision to call a popular vote, a move that pummeled the euro and global stocks, but the cabinet support at least gives him a stay of execution before a confidence vote in parliament Friday.

"The referendum will be a clear mandate and a clear message in and outside Greece on our European course and participation in the euro," Papandreou told the seven-hour cabinet meeting, according to a statement released by his office.

Stocks aim lower with Italy at crisis point

"No one will be able to doubt Greece's course within the euro."

After the apparent show of unity at home, Papandreou will later face the leaders of France and Germany, who summoned him for crisis talks in Cannes, before a G20 summit of major world economies, to push for quick implementation of the bailout deal.

Whatever the result of the referendum, Papandreou's gamble guarantees long weeks of uncertainty just when the 17-nation currency area was desperate for a period of calm to implement remedies agreed last week to overcome its sovereign debt crisis.

"This announcement took the whole of Europe by surprise," French President Nicolas Sarkozy said in a rare televised address on the steps of the Elysee palace in Paris. "The plan ... is the only way to solve Greece's debt problem."

Japan's finance minister, Jun Azumi, echoed his comments, as the Nikkei share average fell as much as 2 percent Wednesday. "Everyone is bewildered," he said.

Timing, result unpredictable
Greek government spokesman Elias Mossialos said the referendum would take place "as soon as possible, right after the basics of the bailout deal are formulated," but would not be drawn on whether that meant before Christmas.

With so much of the detail of the deal to keep Greece afloat still to be nailed down, the vote seems unlikely to take place before the end of the year and Greek officials said on Monday it was likely in mid-January.

Opinion polls suggest most voters think it is a bad deal, but much will depend on how Papandreou frames the debate, either on the bailout -- and hence the cuts that will follow -- or membership of the euro, which remains popular.

German Finance Minister Wolfgang Schaeuble told Wednesday's Financial Times Deutschland newspaper he was confident the Greeks would support the government's reforms in the referendum.

"If Greece accepts the burden and efforts required by the aid programs, if it wants to stay within the euro zone, then we will support it," Schaeuble said.

Papandreou said Greece's partners would support its policies and urged the G20 meeting in Cannes to agree policies that "make sure democracy is above market appetites."

But his move is bound to embarrass G20 host Sarkozy as he tries to coax big emerging nations such as China into throwing the euro zone a financial lifeline by investing an expanding bailout fund.

It could also further undermine dwindling political support in northern Europe for aiding Greece.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt if voters rejected the bailout package.

Confidence vote
Papandreou's most immediate hurdle is the parliamentary confidence vote Friday.

"We believe the government will once again win a vote of confidence in order to proceed with its plans," government spokesman Angelos Tolkas told reporters. "We will not back down on anything we have to do to save the country."

Six senior members of Greece's ruling PASOK socialists, angered by Papandreou's decision to call a plebiscite on the 130 billion euro rescue package, said he should make way for a "politically legitimate" administration.

During the cabinet meeting that wrapped up around 3 a.m. after seven hours, some ministers questioned the timing of the referendum and criticized the fact they had been kept in the dark -- even the finance minister had not been told -- and a handful were openly against it, government sources said.

"I think this was the wrong decision and we must take it back," one minister was quoted as saying. "We must not risk our position in the euro."

A leading PASOK lawmaker earlier quit the party, narrowing Papandreou's slim majority to 152 of 300 seats, and several others called for a government of national unity followed by a snap election, which the opposition also demanded.

Papandreou needs 151 votes to enact the referendum. If any of the dissenters votes against, it cannot be held, and there is still plenty of dissent.

"For the first time we are admitting publicly that our policy lacks legitimacy," one minister said he told the meeting, speaking to reporters on condition of anonymity.

Shares pounded
Doubt about Europe's ability to contain the debt crisis has once more sent investors fleeing from riskier assets across the world. Asian shares fell and the euro hovered near three-week lows against the dollar Wednesday.

U.S. stocks tumbled more than 2.5 percent and European shares posted their biggest one-day loss in more than a month Tuesday.

The risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high Tuesday, raising Rome's borrowing costs to levels above 6 percent that proved unsustainable for Ireland and Portugal.

European bank shares dived on fears of a disorderly Greek default and the Athens Stock Exchange suffered its biggest daily drop since October 2008, with the general index shedding 7.7 percent.

Greece is due to receive an 8 billion-euro IMF/EU aid 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.

Dutch Finance Minister Jan Kees de Jager said the IMF might have difficulty paying out that tranche because of the looming referendum. "I can imagine it will be difficult for the IMF to decide about the tranche but there will be uncertainty ... it is problematic," he told the Dutch parliament.

Copyright 2011 Thomson Reuters.

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Italy eyes unity cabinet as EU dithers on crisis

10:18 AM cabinet, crisis, dithers, Italy, unity No Comments

After four days of chaotic haggling, former European Central Bank vice-president Lucas Papademos was appointed to head an interim crisis cabinet charged with saving Greece from default, bankruptcy and an exit from the euro zone.

In Rome, former European Commissioner Mario Monti emerged as favorite to replace Italian Prime Minister Silvio Berlusconi within days and lead an emergency government that would implement long delayed reforms of pensions, labor markets and business regulation.

Political and economic turmoil in Italy has spurred fears of a possible break-up of the euro zone with borrowing costs for Europe's third biggest economy at unsustainable levels and the 17-nation currency bloc unable to afford a bailout.

German Chancellor Angela Merkel, Europe's main paymaster, called for broad political support for reforms in Greece and said she believed Italy was winning back confidence, but political clarity was still needed in Rome.

She rejected talk of a possible shrinking of the currency area, saying: "We only have one goal, that is to bring about a stabilization of the euro zone in its current form."

European Union officials continued to dither and pass the buck on how best to fight the worsening sovereign debt crisis.

Three senior ECB policymakers rebuffed pressure from investors and foreign governments to intervene massively as a lender of last resort on bond markets to shield Italy and Spain from rapidly spreading financial contagion.

"We have gone pretty far in what we can do but there is not much more that can be expected from us. It is now up to the governments," ECB governing council member Klaas Knot told the Dutch parliament.

Knot, who is also Dutch central bank chief, said bond-buying only had a temporary effect. The ECB has bought more than 180 billion euros of peripheral euro zone bonds and traders said it was active again in the market on Thursday, but the purchases have failed to lower borrowing costs durably.

Stepping up the scale of bond-buying would eventually force the ECB to start printing money with the risk of stoking inflation, which was why the EU treaty had excluded such action, Knot said.

ECB executive board member Peter Praet said it was not the task of the central bank to intervene "when there are fundamental doubts about the sustainability of some countries". Outgoing ECB chief economist Juergen Stark earlier rejected calls for the ECB to act as lender of last resort like the U.S. Federal Reserve or the Bank of England.

In Brussels, a euro zone official said there were no plans to use the bloc's 440-billion-euro ($600 billion) rescue fund to help Italy, even with a precautionary credit line.

"Financial assistance is not in the cards," the official said. A second official said: "The ECB will be drawn like every one else by the weight of gravity (to act)."

MARKETS STEADIER

Italian 10-year bond yields steadied at around 7 percent, a level seen as unquestionable in the long term, due to signs that the political deadlock may be easing. Rome paid less to sell 1-year treasury bills than many had feared.

Sources in Berlusconi's conservative PdL party said he was now convinced it would be better not to call elections at the moment, an abrupt reversal. The billionaire media magnate has agreed to resign within days after parliament approves long delayed economic reforms demanded by European partners.

PdL parliamentary floor leader Fabrizio Cicchitto said the party was considering backing a unity government led by Monti, a respected economist favored by the center-left opposition.

Berlusconi's populist coalition partner, the Northern League, said it would not support a Monti government.

Monti, 68, was appointed a senator for life on Wednesday in a move that appeared to prefigure his possible rise to the premiership, but he has made no public statement and it is unclear what conditions he may set for taking office.

In Athens, Papademos said after agreeing to head a crisis coalition: "The Greek economy is facing huge problems despite the efforts undertaken.

"The choices we will make will be decisive for the Greek people. The path will not be easy but I am convinced the problems will be resolved faster and at a smaller cost if there is unity, understanding and prudence."

The euro rose from a one-month low and world stocks inched up on hopes that new governments being formed in Italy and Greece could help fend off a euro zone break-up.

SMALLER EURO ZONE DENIED

Merkel, French officials and the EU's executive Commission all tried to quash talk of a possible shrinking of the euro area, although they raised the possibility last week that Greece might leave the single currency.

EU sources told Reuters that French and German officials had held informal discussions on a two-speed Europe with a more tightly integrated and possibly smaller euro zone and a looser outer circle.

The discussions among senior policymakers, still in the realms of the theoretical, have focused on how to protect the euro zone from breaking up via tighter common policies which some members may by unable or unwilling to live with.

European Commission President Jose Manuel Barroso issued a stark warning of the dangers of a split in the European Union.

"There cannot be peace and prosperity in the North or in the West of Europe, if there is no peace and prosperity in the South or in the East," Barroso said in a speech in Berlin.

Merkel called on Wednesday for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stays more loosely connected.

The head of the International Monetary Fund called for political clarity in efforts to tackle Italy's debt crisis, warning that the world could face a "lost decade" if Europe's problems were not tackled boldly.

Uncertainty around who would succeed Berlusconi was fuelling market volatility, Christine Lagarde said on a visit to China.

"No one exactly understands who is going to come out as the leader. That confusion is particularly conducive to volatility," she told a news conference in Beijing. "Political clarity is conducive to more stability and my objective from the Fund's point of view is better and more stability."

A senior G20 source said the idea of convening an emergency meeting of finance ministers of the world's leading economies to discuss support measures for the euro zone before the French presidency ends at the end of the year had been dropped. They would meet next in Mexico in February.

Euro zone finance ministers agreed on Monday on a road map for leveraging the currency bloc's rescue fund to shield larger economies like Italy and Spain from a possible Greek default.

But markets are running faster than policy and there are deep doubts about the efficacy of those complex leveraging plans, and with Italy's debt totaling around 1.9 trillion euros even a larger bailout fund could struggle to cope.

Copyright 2011 Thomson Reuters.

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