This sector is ready for an explosive rebound

10:30 AM explosive, ready, rebound, sector No Comments

| By James K. Glassman, Kiplinger's

Largely left out of the 2013 rally, real estate investment trusts offer better yields than most income alternatives. And with demand building, investors will reap big rewards if the economy roars back to life.

When I look for stocks to buy, I try to avoid industries that everyone else loves. Rather, I like to look at the sectors that have lagged the most.

Here's an example: At the end of September, the average large-company stock fund had returned 20 percent for the year. Of the 14 mutual fund sectors Morningstar surveyed, all but one had shown a positive return. The exception was precious metals funds, down a whopping 41 percent. But because I have a lifetime aversion to owning anything connected to gold, I looked at the next-worst performer; it was up a measly 2 percent.

That sector was real estate. Most real estate stocks these days come packaged as real estate investment trusts, or REITs. A REIT is a company that owns a portfolio of properties that generate income from rentals plus capital gains when they are sold. A REIT must pass on at least 90 percent of its profits to investors in the form of dividends. A total of 171 property-owning REITs trade on the New York Stock Exchange, with a total market value (shares times price) of $657 billion.

Most REITs specialize in a particular kind of property: Office buildings, apartments, hotels, shopping centers, industrial buildings, medical facilities and self-storage units are the major categories. (Other REITs invest in mortgages, but my focus is on property-owning REITs.)

A big appeal of REITs these days is their dividend yields -- on average, 4.1 percent at a time when a ten-year Treasury note yields 2.7 percent. Of course, because REITs depend on their own earnings to fund payouts to investors, those dividends aren't guaranteed. In 2009, for instance, one of the largest REITs, Vornado Realty Trust (VNO), which owns offices and retail space, cut its annual dividend rate from $3.52 per share to $1.52. Since then, the payout rate has inched back up to $2.92. Vornado's stock, which I like, peaked at $137 in February 2007 and plunged to $27 by March 2009, before recovering to its current price of about $90. (All prices, yields and returns are as of Nov. 15.)

It's no secret why Vornado's price fell. Real estate values soared in the early and mid-2000s, then collapsed starting in 2007, triggering a sharp recession. The S&P Case-Shiller index of home prices rose moderately from 70 in 1988 to 100 in 1999, then rocketed to nearly 200 in 2007 before dropping to about 125.

The values of homes and other kinds of real estate aren't always linked, but the collapse of residential prices affected commercial property values, too. For instance, shares of the average REIT that owns retail space fell 45 percent in 2008, compared with a 37 percent plunge for the Standard & Poor's 500 Index ($INX).

Residential housing prices have been climbing back over the past two years. They are up 12.4 percent in the past year alone, and other real estate sectors are up, too. The CoStar General Commercial index, for instance, shows that prices of office buildings sold in the past year have risen by 8.7 percent.

Investors have anticipated the rebound. Shares of Equity Residential (EQR), a giant apartment-building REIT, rose 58.1 percent in 2010 and 12.8 percent in 2011. But as investors looked forward, their enthusiasm waned. Equity Residential rose a mere 2.5 percent in 2012 and has fallen 9 percent so far in 2013, trailing the S&P by a mile.

Vacancy rates for apartments nationwide are now a low 4.3 percent, and average rents have been rising steadily. But it's the future that counts, and real estate experts worry that the market is softening.

Why? Three reasons. First and foremost is the economy, which is still running a low-grade fever. It just can't seem to regain robust health, and spending and household formations are suffering.

Second, low interest rates in recent years and the lack of new construction have inspired developers to build more. In the apartment sector, for example, a lot of units will be coming online in 2014 and 2015 (though still at only about half the rate of 2000-2007). If the economy comes back, things will be fine; there will be plenty of renters to occupy those units. Otherwise, it may be hard to raise rents and fill properties.

Third, although interest rates are still low (inspiring developers to build now), they are rising -- making mortgages more expensive and discouraging consumers.

So where do we go from here? I am optimistic enough to be willing to buy, though I'd feel more comfortable if REITs fell another 10 or 20 percent.

Here is the case: Demand is building up in the economy, and when it is released, it will explode -- maybe even as much as it did right after World War II.

Young Americans want to move away from their parents, businesses want to expand and retailers want to open new shops. But the economy has them scared. If the U.S. continues to grow at just 2 percent a year, then interest rates won't rise much, and REIT yields in the 3 to 4 percent range will continue to look attractive compared with other income alternatives. Meanwhile, if the economy comes roaring back, REITs will be huge beneficiaries.

Vanguard REIT Index (VGSIX), a mutual fund that tracks the MSCI REIT index, is a solid choice. It charges just 0.24 percent per year and has returned 9.2 percent annualized over the past ten years with a portfolio that includes the works: apartment, office, retail and specialty REITs. Its biggest holding is the largest REIT, Simon Property Group (SPG), which owns about 325 shopping malls.

For an actively managed fund, the best is Cohen & Steers Realty (CSRSX), run by a firm that specializes in real estate stocks. Its annual expense ratio is higher, at 0.98 percent, but its record over the past ten years is a bit better: an annualized return of 10.2 percent. Simon Property is also this fund's top holding, but the rest of the portfolio looks very different from the index. One drawback is its $10,000 minimum investment.

As for individual REITs, look for those with yields that are above the industry average. Washington REIT (WRE), with a 4.9 percent dividend, is a well-run company with a mix of office buildings, shopping centers and apartments in and around the nation's capital. (I recommended the stock in a February article on ways to get annual income of 4% or more.) Glimcher Realty Trust (GRT) offers a 4 percent yield and owns regional malls, such as Colonial Park in Harrisburg, Pa., while Healthcare Trust of America (HTA) pays a 5.4 percent dividend and owns medical office buildings.

Over the past ten years, the REIT subsector with the best record is self-storage, with annualized returns of 18.4 percent. Rather than buying a bigger house, some people rent a storage unit for their stuff. I am a big fan of Public Storage (PSA), the largest REIT in the category, with a market value of $28 billion, and its 3.4 percent yield. Public Storage shares got clobbered in 2007, but they have risen in each of the past six years, including 2008 (a rare stock that climbed during that calamitous year) and 12 percent so far in 2013.

Uh-oh. Should a contrarian be wary of a stock Mr. Market likes so much? Well, yes, but I am willing to make a few exceptions for great companies.

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Get ready for deflation

3:00 PM deflation, ready No Comments

| By Jim Jubak

The recovery from the financial crisis has produced a raft of unintended consequences. Quite possibly the biggest is the absence of inflation and the emergence of deflation.

Is it time to talk about the "D" word?

You know, deflation.

I know that inflation has been and continues to be the big worry. And that's only logical, since you'd figure that with the Federal Reserve, the European Central Bank, the Bank of Japan and other global central banks pouring money into the financial system that we will have to see inflation at some point. And I think that continues to be a real danger: At some point, all that monetary stimulus will result in across-the-board asset-price inflation (in contrast to the selective asset inflation we're seeing now in areas such as residential real estate in China) and at some point all that central bank cash will start pushing up prices in general.

But we're not at that "some point" yet.

It looks like first we'll go through a period where the trend is, surprisingly, toward deflation. Not across the board -- I don't think we're looking at a global equivalent of the Japanese experience of the last 15 years, where prices in general fall and then fall. But we are likely to see strong deflationary trends in huge hunks of the global economy, and the trends will be strong enough so that stock prices, and investors, will notice.

Another surprise from the global financial crisis and the unprecedented experiments that global central banks are running an attempt to create a sustained recovery? You bet.

Jim Jubak

Here's what this period of deflation will look like and why it has made this unexpected appearance.

Just a reminder: By this point in the recovery from the crisis, global economies were supposed to be running toward dangerous inflation. That was certainly the premise behind all those recommendations (mine included) to hedge against inflation by buying gold or gold mining stocks.

With global central banks pumping cash into the financial system, inflation seemed a lock. Certainly, it was reasonable to believe that if the Federal Reserve, to take one central bank, expanded its balance sheet by some $3 trillion (the Fed's balance sheet stood at $3.53 trillion as of July 24) it would have some effect on inflation.

Reasonable, yes. Predictable, no. The recovery from the financial crisis has produced a raft of unintended consequences. And the absence of inflation and the emergence of deflation is quite possibly the biggest.

Certainly inflation is very low in the world's developed economies -- an annual rate of 0.4% in Japan, 1.6% in the United States (if you look at the core consumer price index or 1.1% if you use the Federal Reserve's preferred price index for personal consumption expenditures) and 1.6% in the eurozone. In each of those cases inflation is running below the central bank's target inflation rate.

It's higher in developing economies such as Brazil (6.7%) and China (2.7%) but in the context of the historical inflation rates in those economies, inflation isn't extraordinarily high.

Why this absence of inflation?

A part of the reason is happenstance. For example, the U.S. energy boom has added new supply to the global oil and natural gas market, and that has helped keep energy prices low even as the shutdown of Japan's nuclear power plants has added to demand.

But more important has been the direction of flows of all this global cash. It, by and large, hasn't produced a spike in consumer demand for reasons that range from the way that this cash has flowed from central banks into the global economy to the timing of programs of economic austerity in the eurozone and the United States. The increase in U.S. Social Security withholding taxes at the beginning of 2013 took money out of consumer wallets, for example, even as the Federal Reserve was trying to stimulate consumer demand, through the much more circuitous route of making consumers feel richer, and thus able to spend more, because the value of their houses had started to climb again.

The most immediate effect of central bank policies has been to make money cheaper to borrowers. Not all borrowers, mind you. Small and medium-sized businesses, whether in China or Europe or (less so) the United States, have found credit hard to get even as the biggest companies in national economies have found credit easy and cheap. (In the United States many consumers who wanted to take out a mortgage found that banks had tightened their credit standards so that they didn't qualify for a low-rate mortgage. That has only recently started to change.)

Some of that cheap money for the big guys has flowed into financial assets. The U.S. stock and bond markets -- and the U.S dollar -- have been major beneficiaries. It is extraordinary that as worries about the Federal Reserve's balance sheet and U.S. financial governance have mounted, the price of U.S. Treasurys climbed and the yield on U.S. government debt fell. The U.S. gets a credit downgrade from AAA and Washington demonstrates that it will lurch from financial crisis to financial crisis, and the yield on the 10-year Treasury note declines?

But that still left a good part of that cheap money available to the CEOs of big companies able to tap the credit markets in China or the European Union or the United States. At some companies that cheap money has been used to refinance more expensive debt and shore up balance sheets. At others it has been used to add new production capacity.

Add more capacity in the midst of a period of very slow economic growth?

Yes, for two reasons.

First, in industries where adding new capacity can take five or more years, companies have to build for projected demand. Waiting until the demand actually materializes is waiting too long. So in industries such as mining or semiconductors or autos, companies looking five years out as the economy stabilized in 2009 and 2010 -- and as the cost of money fell to near historic lows -- decided it made sense to increase capital spending budgets for projects that would come on line in 2014 or 2015, just in time to meet rising demand.

Second, in economies structured around incentives other than profit -- such as, say, job creation or market share or production volumes -- companies raised cheap capital to add capacity since that guaranteed the ability to raise more capital in the future and covered up a current lack of profits.

Borrowing money to expand -- so that the company could make government officials happy -- was a critical survival technique even if, by any reasonable profit and loss calculation, the extra capacity would not be profitable and would indeed increase losses. (Of course, these companies could "pay" for these losses by borrowing more from lenders who wanted to keep these companies in business.) China's economy, the world's second largest, saw many of its big state-owned companies follow this path.

The end result of adding so much global capacity in industry after industry wouldn't have been a river of profits even if the world economy had staged a robust recovery. But in a modest recovery that actually looks to be slowing currently, the result has been a glut of capacity that has hit profits hard as supply outpaced demand.

In China those effects were obvious in profit numbers announced on July 27. Net income at China's industrial companies rose 6.3% in June from June 2012, according to the National Bureau of Statistics. That was a huge drop from the 15.5% year-over-year growth rate in May. That number overstates the profitability of Chinese companies too, since it includes income from ancillary, often speculative, activities such as investing or real estate. Looking just at profit from main business operations, net income fell 2.3% in June, year over year, from an 8.8% gain in May.

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Gold is ready to shine again

12:00 PM again, ready, shine No Comments

| By Anthony Mirhaydari, MSN Money

Does the recent rebound in prices signal a long-term turnaround for the precious metal? Here's why it just might.

Certainly, gold has picked itself off the mat. Prices have rebounded, up 9% from the low, as the dollar has weakened, the Fed has softened its message about tightening the money supply, and a surge in crude oil prices has revived inflation concerns.

All those factors favor higher gold prices, because a strong dollar and a softer money supply feed inflation, and the yellow metal is the traditional inflation hedge.

Other factors favor a turn, too, including simple inevitability. Gold is now going for around $1,290 an ounce, down from its all-time high near $1,900, and no trend lasts forever.

So while it's likely too early to jump in just yet, a careful look at what's happened to gold and what might happen next tells me to get ready. Here's why the rebound should continue.

First, consider the combination of factors that has crushed gold (and silver) prices since October.

Inflation, and fear of inflation, waned. Energy prices dropped. Interest rates increased. And above all, the Federal Reserve indicated -- hinting shyly at first before hammering the message home -- that it was preparing to scale back its cheap-money economic stimulus efforts. Specifically, it was looking at "tapering" its $85 billion-a-month bond-buying program.

Anthony Mirhaydari

This stimulus is what gold fans in particular deride as "money printing." It keeps them up at night worrying about the dollar's collapse.

That new Fed direction strengthened the dollar, which gained 8% from its low in September to its high earlier this month. And that pummeled the price of gold, which is valued as an alternative to the greenback that will keep its value. The yellow metal lost 34% in the period, falling from nearly $1,800 an ounce to just $1,179.

Investors bailed, pulling money out of gold exchange-traded funds such as the SPDR Gold Trust (GLD) ETF. And small speculators in the futures market expanded their bets against the metal to a net short position -- meaning that in the aggregate they were betting that prices would continue to fall -- for the first time since at least the early 1990s.

But in the past few weeks, this picture has changed. The Fed blinked. Crude oil prices tested $107 a barrel for the first time since early 2012. And gold bounced.

Can that bounce continue?

The first thing to consider is that the price decline has taken gold below the all-in cash cost of production for many mining companies, which are struggling with higher operating expenses, increased political risk (witness the platinum strikes in South Africa) and that fact that new gold discoveries are happening almost exclusively in unfriendly parts of the world.

In short, the problem is that high production levels no longer pay at today's prices -- which means production cuts.

On Monday, in fact, AngloGold Ashanti (AU) cut its 2013 gold production forecast by upward of 10%, to four million ounces, in an effort to remove "unprofitable ounces from our production profile."

Researchers at Barclays Capital estimates that the industry's marginal cost -- that is, the cost to produce an additional ounce of gold at 90% capacity -- is around $1,300 an ounce. The average cost of production -- the cost at 50% capacity -- is around $1,100.

So it's no surprise that supply is being pulled from the marketplace. Already, according to Bank of America Merrill Lynch analysts, one-third of the industry is "underwater" in that prices aren't covering the cash production costs.

The other side of the equation is demand. And in particular, demand from investors.

Yes, there is a small industrial component to demand for gold. About 10% of annual gold production is used in electronics, where it's valued as a high-quality conductor. According to Societe Generale, this number isn't expected to change much in the foreseeable future.

There's also demand for gold production for use in jewelry, particularly in the emerging Asian economies -- especially India, where gold plays an important cultural and religious role. A strong monsoon season is expected to bolster crop yields, which in turn should bolster gold demand later in the year as farmers traditionally snap up a few gold pieces when their harvests are sold. Overall, jewelry demand expanded 12.3% in the first quarter of 2013 compared with the same period in 2012, to 551 metric tons.

The big swing factor is investor demand. And that is expected to rebound later this year, according to Standard Chartered analysts, who are looking for prices to rally above $1,400 an ounce by year's end -- an 8% move from current levels.

The chart below shows just how severe the pullback in investor demand has been. Assets in the SPDR Gold Trust ETF, which are backed by physical gold, have fallen 50%, returning to early 2009 levels.

For gold to keep going, this picture would need to turn around, a trend that tends to be somewhat self-fulfilling. As gold prices rise, so does demand from investors, which in turn would push prices higher. A good dose of inflation worry would help as well.

The good news for gold investors is that it looks like all that might just happen.

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Bernanke says Fed still ready to act if it's needed

6:00 AM Bernanke, needed, ready, still No Comments

Fed Chairman Ben Bernanke offered his views on the economy and inflation in a wide-ranging news conference.

By John W. Schoen, Senior Producer
Even as the economy shows signs of slowing and the unemployment rate remains stuck at painfully high levels, Federal Reserve Chairman Ben Bernanke spent much of a news conference Wednesday explaining why central bankers have decided -- for now -- to do nothing.

Earlier in the day, the central bank's policy-making Open Market Committee repeated its promise to leave interest rates on hold at current rock-bottom levels until at least late 2014. But it gave little guidance on whether it might take additional steps later this year to try to boost growth.

"We remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives," Bernanke told reporters. "So those tools remain very much on the table, and we would not hesitate to use them should the economy require that additional support."

In June, the Fed is scheduled to wrap up its latest effort to spur growth, one of a series of moves since the financial collapse of 2008 to buy up more than $2 trillion in bonds to force interest rates lower. Until recently, the U.S. economy has been moving strongly enough to allow policymakers to hold off on efforts to force rates even lower.

But as Fed officials wrapped up a two-day meeting on Wednesday, the government reported that orders for durable goods plunged 4.2 percent in March, the biggest drop since the economy was contracting sharply in early 2009. It was the latest sign that the U.S. economy began slowing again at the end of the first quarter.

In its official statement, the Fed described the economy as expanding moderately, just as it did in March, and noted that the unemployment rate had declined but remains elevated at 8.2 percent. Officials noted a pickup in inflation but said the latest price increases, driven largely by higher oil costs, are likely only temporary. Economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," the central bank said.

Related: Full text of the Fed's statement

For now, in other words, the best policy is to wait and watch for signs that those record low interest rates are working.

"The committee is solidly in this camp," said economist Laurence Meyer, a former Fed governor. "If the economy plays out as expected and reflected in the forecast, they are not going to do anything. On the other hand, there's some threshold, there's some deterioration in the outlook that would motivate" more aggressive moves.

"We haven't passed that threshold by any means, and we have to see a deterioration to get that. "

But the Fed acknowledged that an already weak economic rebound will likely weaken a bit further before it gains strength.

U.S. gross domestic product expanded at a 3 percent annual rate in the fourth quarter but is widely estimated to have slowed to around a 2.5 percent pace in the first three months of this year. The government will release its preliminary estimate for first quarter GDP on Friday.

Forecasting the economy's direction and the future course of inflation and interest rates is never easy. But central bankers around the world face an unusually cloudy future as they try to predict what comes next.

Financial turmoil in Europe, tamed temporarily by a series of fragile agreements, appears to be resuming. Though the immediate threat of a Greek bond default was averted, longer-term measures that were pieced together to stabilize the faltering economies of Spain, Portugal and Italy appear to be coming apart.

The collapse of the Dutch government, renewed fears about the solvency of Spanish banks and the narrow first round re-election defeat of French president Nicolas Sarkozy have rattled investors. Those developments have also underscored deep political divisions over how to tame bloated government debt levels without driving the European economy further into recession.

"Progress has been made, but obviously judging by market conditions there a lot more to be done," Bernanke said.

Bernanke and the Fed face a similar unknown at home as two powerful budget forces -- the expiration of Bush-era tax cuts and "automatic" spending cuts agreed to last August -- threaten to collide at the end of the year. Some Fed watchers have suggested that as the November election approaches, central bank policymakers will be increasingly reluctant to make major changes in an effort to appear to remain above the political fray.

Bernanke's regularly scheduled press conference continues the Fed's efforts of attempting to shed more light on its deliberations. With its new policy of offering detailed forecasts and a pledge to hold interest rates steady well into the future, the central bank also is in uncharted waters.

There's always a chance the Fed's forecast is too pessimistic -- and that the economy will gain strength more quickly, forcing the unemployment rate lower and raising the risk of higher inflation.

That could be bad news for the financial markets, especially investors holding Treasury bonds, who would lose money as interest rates move higher. (Rising rates lower the value of bonds already in the market because those existing pay less than a newly-issued bond with higher rates.)

That's why the Fed is expected to give investors plenty of warning if and when it decides rates need to go higher.

Still, central bankers are probably better off with a forecast that's too conservative, even if it means getting caught off-guard down the road by a stronger-than-expected economic rebound.

"Who else will complain if the Fed has to raise rates in 2013 because the economy turns out to be stronger than expected?" said Ian Shepherson, chief U.S. economist at High Frequency economics. "Sometimes it's good to be proved wrong."

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Greek PM reportedly ready to step down

6:02 AM Greek, ready, reportedly No Comments

ATHENS, Greece — Greek Prime Minister George Papandreou faces a knife-edge confidence vote on Friday after his plan for a referendum on a bailout -- supposed to save both Greece and the euro zone from disaster -- backfired disastrously.

But even if his socialist government survives the parliamentary vote, Papandreou's days as Greek leader looked numbered after a deal with his cabinet under which, government sources said, he agreed to stand down after negotiating a coalition with the conservative opposition.

Much of Greece and many European leaders reacted with horror after Papandreou abruptly announced on Monday that he would put the 130-billion-euro ($180-billion) rescue plan, agreed at a euro zone summit only last week, to the Greek people.

Papandreou came out fighting, rejecting opposition demands, in public at least, that he make way for a caretaker administration with just two tasks: forcing the bailout through parliament without a referendum and calling of snap elections.

However, analysts said Papandreou may not be around much longer to fight such battles.

"The prime minister's position is very difficult, since he chose not to respond to the opposition's proposal for a transitional coalition government. Therefore I believe that it is unlikely that he will win the vote," said head of ALCO pollsters, Costas Panagopoulos.

Through waves of austerity policies demanded by the nation's international lenders, Papandreou has carried the parliamentary group of his PASOK party with him, despite much grumbling within the ranks.

But a steady trickle of defections has reduced his majority to the point that one or two waverers could inflict a defeat in the confidence vote, expected as late as midnight (6 p.m. EST)

PASOK has 152 deputies in the 300-member parliament. But lawmaker Eva Kaili said that while she would stay in the party, she would refuse to support the government in the confidence vote, meaning Papandreou could count at most on the support of 151 deputies.

Only one more defection would strip the government of its majority and probably trigger early elections.

Meanwhile, Greece's cost of borrowing ballooned, with the interest demanded by markets to buy Greek 10-year bonds exceeding 31 percent — compared to 2 percent for European powerhouse Germany.

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Greeks have fought tooth and nail against policies which have brought spending cuts, tax rises and job losses, pushing the nation into three years of recession, and they have staged a series of strikes and protests, some of which turned violent.

This made a "no" vote in any referendum highly likely, even though this would cut off Greece's last international financial lifeline and risked spreading its debt crisis to much bigger euro zone economies, such as Italy and Spain.

But after a tumultuous day in Greek politics, the chances of the referendum being held dwindled to almost nothing on Thursday. Papandreou offered to drop the idea anyway if the conservative opposition backed the bailout in parliament.

Over the day, he talked about negotiating with the conservative New Democracy party, saying the national interest ranked well above his personal ambitions. "I'm not tied to my post. I'm not interested either in being re-elected, I'm only interested in saving the country," he told parliament.

Papandreou also called on his PASOK party to rally behind him in the confidence vote. But his public bravado appeared to mask an acceptance that his term may come to an end soon.

Government sources said Papandreou had struck a deal at a cabinet meeting on Thursday under which he would stand down after he had negotiated a coalition agreement with the conservative opposition -- provided he survives Friday's vote.

Ministers involved in striking the deal with Papandreou, led by Finance Minister Evangelos Venizelos, said he should go for the sake of their PASOK party, said the sources, who had knowledge of Thursday's meeting of the cabinet.

Papandreou was summoned to an emergency European meeting in Cannes, France, on Wednesday night, where the visibly irate French and German leaders said any referendum would in fact be a question of whether Greece retains its cherished membership of the 17-nation euro common currency. They also put on hold the next, vital payout of Greece's existing bailout until after a vote was held.

A Greek Finance Ministry official told the AP that Greece has cash until mid-December. After that, without the €8 billion ($11 billion) disbursement, Greece would most likely be unable to service its debt or pay pensions and salaries.

Venizelos accompanied Papandreou to the Riviera but led a revolt against the referendum idea on his return to Athens before dawn Thursday.

With Greece's euro membership and bailout loan lifeline suddenly in danger, pressure mounted for Papandreou to resign. The conservative opposition and even his own deputies called for the creation of a transition government to pass the new European debt deal.

Venizelos said, as the opposition now indicated it would support the European debt deal, a referendum was no longer necessary.

"The government went to Cannes with the position that if the necessary consensus is formed there will be no need to hold a referendum," he said. "We must highlight the fact that there is a window of a consensus."

He said the new debt deal would be brought to parliament under a procedure that would require a reinforced majority of 180 out of the 300 lawmakers to vote in favor. With the governing Socialists holding 152 seats, that means the debt deal will only pass if the opposition also votes in favor.

But conservative opposition leader Antonis Samaras quickly dispelled any impression of unity, arguing that he had already agreed to back the vital deal, and demanded elections — within the next six weeks if possible.

Europe's deepening crisis threatens US economy

Papandreou "nearly pulled the universe apart to supposedly persuade me to agree to something that I had already said was unavoidable," he told parliament later Thursday, during a debate on the upcoming confidence vote.

"Mr. Papandreou pretends that he didn't understand what I told him," he said. "I called on him to resign."

Samaras then led his lawmakers in a dramatic walkout of the debate, without indicating whether he would vote in favor of the deal.

The drama in Greece sent immediate ripples throughout Europe. Premier Silvio Berlusconi's government in Italy was teetering as well Thursday after it failed to come up with a credible plan to deal with its dangerously high debts, and Portugal demanded more flexible terms for its own bailout. The European Central Bank made a surprise decision to cut interest rates by a quarter of a percentage point, to 1.25 percent, in an acknowledgment of the fragility of the continent's finances.

Talk of Greece also dominated the G-20 summit in the French resort of Cannes, where the leaders of the world's economic powerhouses gathered to solve Europe's debt crisis, which threatens to push the world back into recession.

During a summit break, French President Nicolas Sarkozy praised the Greek opposition's backing for the debt-crippled country's new bailout as "courageous and responsible."

Greece's new debt deal would give the country an extra €130 billion ($179 billion) in rescue loans from the rest of the eurozone and the International Monetary Fund — on top of the €110 billion ($152 billion) it was granted a year ago. It would also see banks forgive Athens 50 percent of the money it still owes them. The goal is to reduce Greece's massive debts to the point where the country is able to handle its finances without constant bailouts.

Polls indicate the Greek public is close to the breaking point after more than 20 months of harsh austerity cuts and tax hikes. Recent opinion surveys show 90 percent opposing Papandreou's policies and his party polling just 20 percent public support.

Underlining that point, 300 people held a peaceful anti-austerity protest in central Athens late Thursday

The political drama continues Friday, when parliament will hold a confidence vote on the government. Papandreou's majority has been reduced to the bare minimum 151 after Socialist lawmaker Eva Kaili said she would not vote in favor.

"Tomorrow's vote is of particular significance, for the confidence vote provides a guarantee of how we will make our new steps ... and how we will talk with the opposition parties," Papandreou said.

The omens are poor: The two other European governments besides Greece that have received bailouts — Portugal and Ireland — have seen their governments fall during the economic turmoil.

Reuters and The Associated Press contributed to this report

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