Greek Unity Deal Is in Disarray Amid Squabbles

By Eleni Chrepa, Maria Petrakis and Natalie Weeks - Nov 10, 2011 5:34 PM GMT+0700

Greek Prime Minister George Papandreou and other party leaders were holding talks with President Karolos Papoulias after squabbles over a new premier pushed unity government plans into disarray, undermining a bid to secure bailout funds needed to prevent a financial collapse.

Antonis Samaras, leader of the opposition New Democracy party, Papandreou and opposition LAOS party leader George Karatzaferis were joined by former European Central Bank Vice President Lucas Papademos in the meeting held on their fourth day of wrangling over a unity government. Papandreou was poised to resign yesterday after he told the nation in a televised address the parties had agreed on a new government that will secure international financing for the country.

“This is the third meeting I’m attending,” Samaras told reporters as he arrived at the presidential palace in Athens today. “I hope it’s the last one.”

Papandreou didn’t name a new prime minister in his speech. Greece’s two biggest political parties agreed to back parliament speaker Filippos Petsalnikos to head the government, To Vima newspaper reported, without saying how it got the information. Earlier media reports suggested that Papademos would become premier.

Agreement Falls Apart

Any agreement that had been reached fell apart shortly after Papandreou’s speech as Karatzaferis, the head of the fourth-biggest party in parliament, walked out of a meeting with Papandreou and Samaras saying he was opposed to Petsalnikos.

The euro gained 0.5 percent to $1.3604 after a 2.1 percent drop yesterday, the most in more than a year versus the dollar. Asian stocks plunged, with the MSCI Asia Pacific Index declining 3.3 percent to 116.05 as of 6:49 p.m. in Tokyo.

European stocks advanced with the benchmark Stoxx Europe 600 Index adding 0.8 percent today at 11:50 a.m. Athens time. Greece’s benchmark general index rose 2.6 percent to 787.21. National Bank of Greece SA (ETE), the country’s largest bank, surged 11 percent to 2.26 euros. EFG Eurobank Ergasias SA (EUROB), the country’s second-largest lender gained 7.7 percent to 84 euro cents while Alpha Bank SA added 11 percent to 1.23 euros.

The yield on the 10-year Greek bond rose 4 basis points to 27.66 percent.

Talks Drag On

Negotiations on a government between Papandreou and Samaras have stumbled as the two sides disagree on a prime minister and the opposition balked at European Union demands for written commitments to secure a bailout package.

The new government must implement budget measures and decisions related to an Oct. 26 European bailout deal that’s worth 130 billion euros ($177 billion), including a debt swap, before holding elections.

Immediately at stake is the fate of an 8 billion-euro loan installment under an earlier aid package, a 110 billion-euro EU- led bailout agreed in May 2010. The tranche must be paid before the middle of December to prevent a collapse of the country’s financial system.

The scale of the task facing any new government was underlined today after the European Commission said the country’s debt will be almost twice the economy’s size in 2012 amid a fifth straight annual contraction.

Greek Debt Rises

Greece’s debt will reach 163 percent of gross domestic product this year and jump to 198 percent in 2012, the EU’s Brussels-based executive arm said in its autumn economic forecast released today. That compares with debt of 173 percent predicted by the Greek government in its 2012 draft budget.

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 about 34 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.

“It’s worse than Belgium: There’s the Greek premier who has made a resignation speech but hasn’t resigned; there’s no designated successor prime minister; and main parties are accusing each other of being to blame,” Spyros Economides, senior lecturer at the London School of Economics, said in a telephone interview. “It’s a situation of chaos and denial.”

Papandreou promised his party he would step down on Nov. 4 and put together a new government to bridge differences with EU leaders and officials after his proposal for a referendum on the second Greek financing package roiled markets and Greece.

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Natalie Weeks in Athens at nweeks2@bloomberg.net; Eleni Chrepa in Athens at echrepa@bloomberg.net.

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