EU Leaders Will Tell Papandreou No Alternative to Cuts

By Rebecca Christie and Simon Kennedy - Nov 2, 2011 3:39 PM GMT+0700

European leaders racing to prevent their week-old debt crisis strategy from unravelling convene emergency talks today to tell Greece there is no alternative to the budget cuts imposed in the bailout plan.

Greek Prime Minister George Papandreou, his hold on power weakening, was summoned to Cannes on the eve of a Group of 20 summit where he will hear from French President Nicolas Sarkozy that the “only way to resolve Greek debt problems” is through a deal hammered out last week in a six-day crisis-management marathon.

Papandreou triggered the latest upheaval in the two-year- long crisis by abruptly announcing on Oct. 31 a parliamentary confidence vote and his desire to hold a referendum on the rescue pact. Global stocks, the euro and bonds of debt-strapped countries tumbled yesterday as concern of a disorderly Greek default mounted.

“Given the state of markets and world affairs in general, it is clear that the leaders will work hard at sending a positive message of cooperation and solidarity” from the G-20, said Erik Nielsen, global chief economist at UniCredit Bank AG in London. “But, frankly, it is difficult to be too optimistic.”

People ‘Perplexed’

Papandreou will join a group at about 8:30 p.m. comprising Sarkozy, German Chancellor Angela Merkel, European Central Bank President Mario Draghi, International Monetary Fund Managing Director Christine Lagarde as well as European Union authorities, according to a statement from Sarkozy’s office. They will have met at about 5:30 p.m. without Papandreou.

Japanese Finance Minister Jun Azumi said today in Tokyo that “everyone is perplexed” by Greece’s referendum decision and that the issue will be discussed at the Cannes summit.

Italian Prime Minister Silvio Berlusconi, under pressure to cut Europe’s second-biggest debt load, convened a special meeting of advisers late yesterday to discuss budget-cutting plans. Like Sarkozy, Berlusconi held crisis talks with Merkel yesterday. His key cabinet ministers will meet today to draft measures for the country’s financial stability legislation, the Italian news agency ANSA said, citing government officials.

Europe ‘Surprised’

The euro rose against the dollar today, gaining 0.6 percent to $1.3780 as of 8:21 a.m. in London. It fell 3.1 percent over the previous two days.

European stocks also gained, with the Stoxx Europe 600 Index adding 0.7 percent. The gauge sank the most in five weeks yesterday after Papandreou called the referendum. German bonds declined, after surging yesterday as investors sought the safest assets. The Greek two-year yield was at 86.13 percent today, close to a record high.

Papandreou’s announcement, which Sarkozy said “surprised all of Europe,” threatens to overshadow a Nov. 3-4 Group of 20 summit in Cannes, France. European leaders had designated the talks as a stage to present their plan to stamp out the crisis and end the threat to the global economy.

“The referendum will be a clear mandate and strong message within and without Greece on our European course and our participation in the euro,” Papandreou told his ministers in Athens late yesterday, according to an e-mailed transcript. It will “ensure this course in the most decisive way”.

Greek Pressure

EU officials had hoped to use the Oct. 27 rescue agreement, which includes renewed commitments to fiscal austerity as well as new rescue resources, to anchor their economic agenda at the G-20 summit and secure support from their counterparts. Now, officials meeting as the confidence vote plays out in Athens will be called on to assess the deal’s -- and the euro’s -- future, especially if Papandreou’s government falls and Greece comes under more pressure to default or leave the common currency.

European leaders agreed to boost the European Financial Stability Facility’s firepower to 1 trillion euros ($1.4 trillion), set aside 100 billion euros for Greece and provide 30 billion euros in collateral for a debt swap that will give Greece’s investors new, lower-risk bonds at 50 percent of the existing bonds’ face value.

The deal to reduce Greece’s debt load will do nothing to aid the country’s recovery from recession, opposition New Democracy leader Antonis Samaras said on Oct. 27. Papandreou’s majority meanwhile slipped as his support narrowed to 152 lawmakers in the 300-deputy parliament amid a party rebellion.

‘Profound’ Risks

Whether the EU’s plan would succeed “was a matter for debate. But at least there was a plan,” Yiannis Koutelidakis of Fathom Financial Consulting in London, said in a note yesterday. “The risks engendered by this move are profound for the euro in general, not just for Greece as the expulsion of any one member state would critically undermine the Economic and Monetary Union.”

Such uncertainty “will likely block any” governments outside the euro-area from stumping up cash for its reworked rescue fund as the continent’s leaders would like, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc. While Brazil and Russia have signalled a willingness to help, Chinese officials say they want more details.

The leaders of Brazil, Russia, India, China and South Africa -- the so-called BRICS -- may also meet in Cannes today, Sergei Prikhodko, Russian President Dmitry Medvedev’s foreign policy aide, said yesterday. Chinese President Hu Jintao, who will also meet Sarkozy today, told Le Figaro newspaper yesterday that he wants stability in the euro area.

A lack of outside assistance will leave the ECB under pressure to keep buying the bonds of stressed states, Cailloux said. Today’s meetings are Draghi’s first on the international stage since he took over the ECB presidency yesterday from Jean- Claude Trichet and come a day before he chairs a meeting of the ECB’s Governing Council for the first time.

While Nomura Holdings Plc economist Jens Sondergaard said he expects the ECB to leave its benchmark rate at 1.5 percent this week, the “adverse market reaction” to Greece’s referendum call leaves a one-in-three chance of a 25 basis point reduction.

To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net; Simon Kennedy in Paris at skennedy4@bloomberg.net

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