Papandreou Wins Vote on Property Tax

By Natalie Weeks and Marcus Bensasson - Sep 28, 2011 4:01 AM GMT+0700

Greek Prime Minister George Papandreou won parliamentary backing for a property tax to meet deficit-reduction targets required to avoid default.

Papandreou’s Socialist Pasok party won the vote in Athens late yesterday by 155 to 142 after Finance Minister Evangelos Venizelos told Greeks they face economic collapse if they don’t plug a budget gap that is exceeding the target set in a bailout, putting an 8 billion-euro ($11 billion) aid payment due next month at risk.

“Implementation of the measures is the biggest challenge for the government as the trade unions and parts of the civil service will mount significant resistance, raising the risk of inertia and inaction,” Wolfango Piccoli, an analyst in London at Eurasia Group, said before the vote.

Concern that a potential default in Greece could damage Europe’s core countries and plunge the global economy into recession dominated weekend talks of policy makers, investors and bankers in Washington, where the International Monetary Fund and World Bank held their annual meetings. President Barack Obama underscored the urgency when he said Sept. 26 that European governments are “trying to take responsible actions, but those actions haven’t been quite as quick as they need to be.”

Greek bonds have tumbled and credit insurance has soared, putting the chance of default at more than 90 percent, as Papandreou struggled to rein in the deficit and a recession deepened in its third year. Two-year notes yield more than 70 percent.

Loan Payment Due

Venizelos said yesterday he expected approval of the next loan tranche “in time.” Papandreou dined with German Chancellor Angela Merkel in Berlin as lawmakers in Athens voted on the tax and also ratified an upgrade of the euro area’s 440 billion-euro bailout fund.

The property tax was part of a package of cuts announced earlier this month after officials from the European Union and IMF told Greece it wasn’t meeting the terms of a May 2010 rescue.

The state budget deficit in the eight months to the end of August widened 22 percent to 18.9 billion euros, more than the target of 18.1 billion euros for the period. Greece has pledged to reduce its general government deficit to about 7.5 percent of gross domestic product this year from 10.5 percent in 2010.

The property levy, to be collected via electricity bills, will provide an annual yield of 1.1 percent of GDP. It will generate as much as 1.8 billion euros, according to Eurobank EFG.

Wages, Pensions

Venizelos also announced an additional 20 percent wage cut, on top of 15 percent for the civil service and 25 percent in the wider public sector. Pensions are being reduced 4 percent on average, in addition to previous cuts of 10 percent. A lowering of the tax-free threshold to 5,000 euros will mean higher taxes for all Greeks.

More than 74 percent of 1,002 Greeks polled by Rass for To Paron newspaper opposed the property tax. The poll also showed that 59 percent believed Papandreou’s government won’t be able to avert a default. The survey had a 3.1 percentage point margin of error. Papandreou’s government trails the opposition party in all polls.

Unions have called general strikes for Oct. 5 and Oct. 19, while public-transit companies including the Athens subway have held strikes over the past few days to oppose the measures.

To contact the reporter on this story: Natalie Weeks in Athens at nweeks2@bloomberg.net; Marcus Bensasson in Athens at mbensasson@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net