Greece Turns to Budget After Confidence Vote

By Maria Petrakis, Paul Tugwell and Marcus Bensasson - Nov 17, 2011 4:56 PM GMT+0700

Greek Prime Minister Lucas Papademos turns his attention to finalizing next year’s budget and a voluntary debt swap, key demands set for the country to receive international financing a day after he won a confidence vote.

Finance Minister Evangelos Venizelos will present the 2012 spending plan to the new cabinet for approval before it’s submitted to parliament for discussion by lawmakers, which he said could be this week. Demonstrators at the same time will gather in Athens to commemorate a student uprising today.

“The policy of fiscal consolidation is necessary after the mistakes of the past several years to create the foundations for a new type of sustainable development,” Papademos told parliament yesterday. “The road is long and requires persistent effort and implies large adjustment costs.”

Papademos, a former European Central Bank vice president, won a three-month mandate to implement budget measures and ensure a bailout of 130 billion euros ($176 billion) agreed to with euro partners on Oct. 26. That will also mean arranging a voluntary swap of Greek debt that aims to slice 100 billion euros off the country’s debt burden of 355 billion euros.

The first priority is to get a loan payment of 8 billion euros by the middle of next month to avert a collapse of the financial system.

Debt swap

Papademos and Venizelos met separately with Charles Dallara, the head of the Institute of International Finance, which represents more than 450 financial companies, in Athens late yesterday as talks resumed on the debt swap.

Dallara will brief the press in Frankfurt today after he and his deputy, Hung Tran, met with representatives of financial services firms to discuss the voluntary agreement to accept writedowns on Greek debt holdings, according to an e-mailed statement. The press briefing will take place at 5 p.m. local time at Deutsche Bank AG’s headquarters in Frankfurt.

Greece regards the two proposals put forward by Dallara as unacceptable because they don’t meet European Union requirements to reduce the country’s debt to 120 percent of GDP by 2020, Kathimerini newspaper reported today, without saying how it got the information.

“The Greek debt swap has always been a fragile project, owing to its voluntary nature,” Thomas Costerg, an economist at Standard Chartered Bank in London, said in an e-mail. “Even assuming that the deal goes through, it remains uncertain that a 50% haircut will be sufficient to put Greece back on a sustainable debt track.”

Payment Plan

Greece plans to pay lenders 50 cents for each euro the government borrowed under the terms of the bailout plan agreed to at the Oct. 26 summit. Its 4 percent notes due in August 2013 now trade at 34.5 cents. Fitch Ratings says the agreement with creditors would amount to a “default event” if implemented, while the International Swaps and Derivatives Association says it won’t trigger credit-default swaps.

The euro fell 0.2 percent to $1.3468 at 11:48 a.m. Athens time, approaching a five-week low as Spain sold less than its maximum target in a debt sale today.

Greece’s benchmark stock index lost 0.9 percent to 711.38. The yield on the 10-year Greek bond added 22 basis points to 28.86 percent. Two-year note yields fell 282 basis points to 110.64 percent after adding 303 basis points yesterday.

Rising Debt

Greece’s debt will reach 163 percent of gross domestic product this year and jump to 198 percent in 2012, the European Commission said in its economic forecast. The estimate doesn’t include the effects of the debt swap. That compares with 173 percent predicted by the government in its 2012 draft budget.

A total of 255 lawmakers in the 300-strong Greek Parliament supported the confidence motion and 38 were against, Speaker Filippos Petsalnikos said yesterday.

Today is the anniversary of the 1973 student uprising against a military dictatorship ruling Greece at the time. Police will deploy 5,000 personnel to guard the march, according to a spokeswoman yesterday. Protesters will pass through central Athens, scene of demonstrations of thousands of people and violent clashes over the past year.

Papademos Poll

Papademos formed a government on Nov. 11 after four days of political arguing that followed global turmoil sparked by former Prime Minister George Papandreou’s plans for a referendum on the terms of the country’s second European bailout.

Disbursement of funds was halted by German Chancellor Angela Merkel and French President Nicolas Sarkozy after Papandreou called for the national vote, which he later dropped.

Most Greeks believe the national unity government led by Papademos is the best chance for the country, according to a poll by Alco SA for Newsit website. Sixty-six percent of the 1,000 Greeks surveyed between Nov. 14 and Nov. 16 responded positively to a question on whether the interim government was best placed to keep Greece in the euro area, compared with 22 percent who responded negatively.

Papademos travels to Brussels next week for his first meeting as premier with European Union President Herman Van Rompuy and European Commission President Jose Barroso.

Greece’s budget deficit in the first 10 months of the year widened 11 percent to 20.1 billion euros from 18.1 billion euros a year earlier, according to preliminary figures received by e- mail from the Finance Ministry in Athens yesterday. The figure is in line with a target of 20.4 billion euros, it said.

The new government needs to push ahead with plans to cut 30,000 state workers and reduce pensions and wages to meet conditions for the loans. Unions have said they plan a general strike when the 2012 budget is voted in parliament.

To contact the reporters on this story: Maria Petrakis at mpetrakis@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net