Talks on Greek Unity Goverment Resume

By Natalie Weeks, Marcus Bensasson and Maria Petrakis - Nov 8, 2011 12:22 PM GMT+0700

Prime Minister George Papandreou resumes talks with his opposition rival in Athens today as they moved closer to agreement on naming the premier of a Greek unity government to secure outside financing and avert a collapse of the country’s economy.

Papandreou and Antonis Samaras, leader of New Democracy, “made progress in talks” yesterday “to name a head of a national unity government,” Elias Mosialos, a Greek government spokesman, said in an e-mailed statement. The two men spoke by phone a number of times yesterday, said a Greek government official who declined to be named. Talks will resume in Athens today, the official said. Papandreou will meet his Cabinet at 12 p.m. local time, NET TV reported, without citing anyone.

There was no confirmation of news reports that Lucas Papademos, the former vice-president of the European Central Bank, would be named Greece’s next prime minister. To Vima newspaper reported yesterday Papademos arrived in Athens and wanted a say in who would be appointed to key ministries in the new government. To Vima didn’t say how it got the information.

The unity government’s mission will be implementing the European summit decision from Oct. 26 on a second Greek financing package of 130 billion euros ($179 billion) before leading the country to elections, according to an e-mailed statement from the premier’s office. Papandreou, who has agreed to step aside for a new prime minister, spoke yesterday with German Chancellor Angela Merkel; Jean-Claude Juncker, who heads the group of euro area finance ministers; and European Commission President Jose Barroso.

Election Mode

“This is the best possible outcome,” Wolfango Piccoli, a London-based analyst at Eurasia Group, which assesses political risks, said in a note. “However, the coalition government is likely to offer only a temporary relief as the political leaders will soon get into ‘election mode.’”

The dollar rose and Asian stocks fell ahead of a parliamentary vote in Italy that will show whether Prime Minister Silvio Berlusconi can stay in power and implement austerity measures. Earlier, 10-year Italian bond yields reached a euro-era record of 6.68 percent, signaling Europe’s debt crisis was intensifying.

The U.S. currency rose 0.2 percent to $1.3748 at 2:16 p.m. in Tokyo, while the MSCI Asia Pacific Index dipped 0.5 percent. Standard & Poor’s 500 Index futures lost 0.3 percent after closing up 0.6 percent yesterday.

Greek Bond

The yield on the 10-year Greek bond rose 88 basis points to 27.65 percent, climbing for the sixth straight day, while the two-year note yield touched a euro-era record above 107 percent. The yield on the 10-year German bund decreased four basis points to 1.78 percent, while the French 10-year yield rose three basis points, driving the difference in yield between the two securities almost eight basis points higher to 130.

Greek media said other candidates being considered as unity government premier are Panagiotis Roumeliotis, the country’s representative to the International Monetary Fund, and Nikiforos Diamandouros, the European Union ombudsman, who told Kathimerini newspaper he hasn’t been approached about the post.

European finance ministers met in Brussels yesterday to discuss the latest developments. The ministers pledged to roll out a bulked-up rescue fund next month, leaving Greece and Italy on the front lines until then in the fight against the debt crisis.

Greece was ordered to provide written acceptance of bailout terms in order to win an 8 billion-euro loan installment by the end of November, while Italy was pressed to turn budget-cut promises into reality.

Conflicting Reports

There were conflicting reports on whether Papandreou and Samaras had settled on a prime minister.

The lack of progress “is not encouraging,” said George Karatzaferis, leader of opposition LAOS party, who has been one of the most vocal supporters of a national unity government. “I hope it happens soon before the situation gets out of control and makes its formation impossible.”

LAOS says it will support the new government and Karatzaferis said it appeared the unity government will be a coalition between the ruling party Pasok and New Democracy.

International Aid

Trying to preserve international aid before the nation runs out of money next month, Papandreou raced over the weekend to clinch an agreement with the opposition before markets opened.

Greece plans to pay lenders 50 cents for each euro the government borrowed under the terms of the bailout plan agreed at the Oct. 26 summit of European leaders and bankers. Its 4 percent notes due in August 2013 now trade at about 35 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.

Papandreou’s surrender caps a tumultuous 10 days that started with him securing a second bailout from the EU, then roiling markets by unilaterally deciding to put the terms of that rescue to the Greek people in a vote, a plan he then dropped. Bowing to pressure from his party and the opposition, Papandreou pledged to stand aside for a government with wider support.

In Brussels, Greek Finance Minister Evangelos Venizelos said he had a “positive and productive” meeting with EU Economic and Monetary Affairs Commissioner Olli Rehn yesterday and discussed procedures to release the sixth tranche of loans under a 110 billion-euro May 2010 EU-led bailout.

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

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