Papandreou’s Power Weakens as Lawmakers Rebel on Vote

By Maria Petrakis, Natalie Weeks and Marcus Bensasson - Nov 1, 2011 9:47 PM GMT+0700

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Nov. 1 (Bloomberg) -- Greek Prime Minister George Papandreou said voters will give him support to forge ahead with economic reforms as he pledged a referendum on the European Union's latest accord on the nation's financing. Owen Thomas and Nicole Itano report on Bloomberg Television's "Countdown." (Source: Bloomberg)

Greek Prime Minister George Papandreou’s grip on power weakened before a confidence vote later this week as his decision to call a referendum on a new bailout package provoked a lawmaker rebellion.

Milena Apostolaki said she will defect from Papandreou’s socialist Pasok party. With Kerdos newspaper reporting that Eva Kaili will also abandon Pasok, Papandreou would only control 151 seats in the 300-seat chamber. Six members of the party called on the premier to resign in a joint letter, Athens News Agency said today. Greek ministers meet at 6 p.m. local time.

Stocks fell, the euro tumbled and Italian bonds plunged on concern that the referendum, which blindsided Greek lawmakers as well as European policy makers, will push Greece into default if the bailout is rejected. Austerity steps imposed by creditors have sparked a wave of social unrest in the past 18 months, undermining support for the government. Papandreou won his last major vote on austerity measures by 154 votes to 144 on Oct. 20.

“If it continues with Papandreou and the referendum, we will end up with a default and the default will push us into the drachma,” former Greek Finance Minister Stefanos Manos said in an interview with Dublin-based broadcaster RTE today. The referendum call puts in jeopardy the payment of the next installment of bailout funds by the International Monetary Fund and the European Union, he said.

Another key member of the ruling party, Vasso Papandreou, called on the Greek president to move toward forming a national unity government.

Forced Default

German bunds jumped, sending yields down the most since March 2009, and the euro weakened while stocks and U.S. futures fell. German 10-year yields slipped 22 basis points to 1.8 percent at 2:16 p.m. in London. Italian bonds dropped, pushing the 10-year yield to as much as 452 basis points above benchmark German bunds, a euro-era record. The euro was 1.4 percent lower at $1.3665 after yesterday’s 2 percent decline.

A rejection of the EU-IMF aid plan “would increase the risk of a forced and disorderly sovereign default” and raises the chance of Greece leaving the euro, Fitch Ratings said in a statement today.

Papandreou, 59, wants to hold a referendum after details of last week’s second bailout package for Greece are approved. The vote of confidence in Parliament is currently scheduled to begin tomorrow and to conclude at the end of this week. Before then, Papandreou will travel to Cannes to discuss the crisis with Group of 20 leaders, according to a Greek official.

‘Uncontrollable Dimensions’

“The crisis in the country has taken on uncontrollable dimensions and threatens the cohesion of Greek society,” said lawmaker Milena Apostolaki, who said she will defect from Pasok. “The titanic effort needed to exit the crisis needs national acceptance and social support. A referendum is a deeply divisive process. I want to express my categorical disagreement with this initiative of the government.”

Most of the 1,009 people surveyed on Oct. 27, the day the new bailout package was announced, said the accord should be put to a referendum, according to the results of a Kapa Research SA poll, published in To Vima newspaper. Forty-six percent said they’d oppose the plan at such a referendum. In the same poll, more than seven in 10 favored Greece remaining in the euro.

Early Hours

“Papandreou’s government is something that defies logic: it ought to have fallen some time ago given the economic situation of Greece,” Niall Ferguson, a historian currently at Harvard University, said in a Bloomberg Television interview. “The reason it hasn’t is that the Greeks themselves aren’t sure if there’s a better alternative to this grim austerity.”

EU leaders carved out a second aid package for Greece at a summit in Brussels lasting into the early hours of Oct. 27, after Papandreou scraped together parliamentary approval for the second round of austerity measures in four months. Greece will receive 130 billion euros ($178 billion) in public funds plus a 50 percent writedown on Greek debt, following a fully taxpayer- funded package of 110 billion euros extended in May 2010.

“For the new agreement, we must go to a referendum for Greeks to decide,” Papandreou told Pasok lawmakers yesterday. “Democracy is alive and well and Greeks are being called to rise to a national duty beyond the regular electoral processes.”

The MSCI All-Country World Index fell 2.75 percent today and the Standard & Poor’s 500 Index lost 2 percent. The Athens benchmark general index sank 7.5 percent to 747.65 at 4:38 p.m. in Athens.

Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian said the referendum call “is material and consequential.”

“In addition to constituting a major political gamble, the run-up will put the European Central Bank, EU and International Monetary Fund in a tough position regarding disbursements to Greece,” El-Erian said in an e-mail today. He also expressed concern that the European Union deal “appears to be unraveling from many sides.”

To contact the reporters responsible for this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Natalie Weeks in Athens at nweeks2@bloomberg.net; Marcus Bensasson in Athens at mbensasson@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Tim Quinson at tquinson@bloomberg.net