Papandreou Struggles to Hold on To Power

By Maria Petrakis and Natalie Weeks - Nov 4, 2011 4:20 PM GMT+0700

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Nov. 4 (Bloomberg) -- Don Hanna, managing director at New York-based hedge fund Fortress Investment Group LLC, talks about the European debt crisis and the outlook for Greece. He speaks from Singapore with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Prime Minister George Papandreou struggled to hold on to power after Greece’s largest opposition party rebuffed his overtures to form a national government, raising the prospect of elections that could delay aid needed to prevent default.

Opposition leader Antonis Samaras rejected sharing power with Papandreou and called on the premier to quit. Papandreou, 59, scrapped a referendum on an accord with the European Union to avert a split in his party before a confidence vote scheduled for midnight tonight.

“I never excluded any topic from the discussion, not even my own position,” Papandreou told lawmakers in Parliament. “I am not tied to a particular post. I repeat I am not interested in being re-elected but just in saving the country.”

Papandreou’s inability to resolve the political gridlock pushes the country closer to the first default by a European Union nation even as his scrapping of the referendum averted potential ejection from the 17-member euro zone. European Commission President Jose Barroso said he expected a government of national unity will conclude the EU agreement before Greece runs out of funds.

“There’s a real danger of a disorderly default,” billionaire investor George Soros said in a speech in Budapest. Without support for Greek lenders, “you’re liable to have a run on the banks in other countries as well. That’s the danger of a meltdown.”

Unified Approach

The euro fell against the dollar, gold declined and European stocks gave up earlier gains. Papandreou’s hope for a unified approach to tackle the financial crisis disintegrated last night as Samaras rejected his overtures before leading deputies of his New Democracy party out of parliament.

Papandreou’s Pasok party controls 152 seats in the 300- member legislature after one lawmaker switched to an independent this week.

If the premier loses the confidence vote, President Karolos Papoulias could try to bring parties together to form a national administration under a new premier or invite opposition parties to form a government. Under Greek law, an election could be held within three weeks.

Unexpected Announcement

The unexpected announcement by Papandreou Oct. 31 that the country would hold a referendum triggered the biggest two-day slide in the MSCI World Index in almost three years and sent spreads on French, Greek and Italian bonds over bunds to euro- era records. Greek two-year bond yields climbed above 100 percent for the first time yesterday after the EU blocked aid.

“With the announcement of a referendum the entire loan accord was up in the air,” Samaras told lawmakers. “This in turn caused a wave of speculative pressure on other vulnerable countries of the union, such as Italy, and this in turn prompted a wave of panic across international markets.”

Papandreou said Greece’s continued participation in the euro was at risk and any rejection of the accord reached in Brussels last week would force Greece to exit the currency.

The Minnesota-born lawmaker has led his party since 2004, three decades after it was founded by his father Andreas at the end of Greece’s military rule.

`Unprecedented'

“It is unprecedented for an elected prime minister of Greece to cast doubt over the only two great achievements since the fall of the military dictatorship -- Greece’s membership of the European Union and of the euro area, in just 72 hours,” said Dora Bakoyannis, a former foreign minister and lawmaker who supported Papandreou in the first bailout vote in 2010 and was expelled from the main opposition party. “The only things we have to be proud of are directly at threat today because of Mr. Papandreou’s brilliant referendum idea.”

The premier has struck a deal to step down after tonight’s confidence vote and hand power to a negotiated government, Reuters reported yesterday.

Papandreou said Greece cannot have a political vacuum at this critical time and that it would be irresponsible for the government to resign.

A nationwide vote would hold up disbursement of Greece’s next aid package that was frozen by German Chancellor Angela Merkel and French President Nicolas Sarkozy in the wake of Papandreou’s unexpected decision to hold the plebiscite.

“One option I consider catastrophic would be to go to elections, Parliament would shut down, we would sink into conflict and polarizations,” Papandreou said. “Its doubtful we would reach the end of elections without going bankrupt and having lost time.”

Boost Firepower

European leaders Oct. 26 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 off the existing debt’s face value.

Banks, Greek authorities and other officials continued to work on a proposed bond exchange even as the political turmoil cast doubt on Greece’s next rescue package.

“We assume that the agreement reached on Oct. 26 and 27 would remain in operation,” Hung Tran, deputy managing director of the Institute of International Finance, a Washington-based banking trade group that negotiated the bond exchange, said yesterday.

Endanger Package

Finance Minister Evangelos Venizelos said early elections would endanger the financing package and the sixth tranche of loans from last year’s bailout.

“The country needs the constitutional instrument of a government, it can’t be ungoverned, unable to negotiate, sign things, get the money from the European Union and International Monetary Fund,” Venizelos told lawmakers.

The European Central Bank unexpectedly cut interest rates yesterday after fallout from Greece pushed up borrowing costs and forced Europe’s rescue fund to cancel a bond issue for the first time.

Canadian Prime Minister Stephen Harper said Greece’s possible exit from the euro currency block was discussed by the world leaders at the Group of 20 summit in Cannes, adding he expected “cooler heads will prevail.”

Barroso said the EU wants to keep Greece in the euro and that the country’s exit from the monetary union would risk setting a precedent for investors.

“They’re really on the verge of being unable to pay for their schools and hospitals,” Barroso said on Europe 1 radio. “Obviously this is the type of situation that requires national unity. We’re saying, ‘Please, agree on the essentials. It’s you the Greeks who have to be united’.”

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net

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