Sept. 4 (Bloomberg) -- Greek Prime Minister Kostas Karamanlis’s decision to call early elections on Oct. 4 is fueling concern that no clear winner will emerge from the vote.

Karamanlis’s New Democracy party has trailed the opposition socialist Pasok party in polls for more than a year, hurt by corruption scandals and unpopular economic policies. Pasok has failed to open up enough of a margin to gain a majority of seats in parliament and form a government, threatening deadlock.

“‘Unless we see a significant shift in opinion polls, that uncertainty is likely to continue until election day,” said Alastair Newton, senior political analyst at Nomura International Plc in London. “I doubt markets will react well to a hung parliament, although a Pasok, or much less likely, a New Democracy majority, would come as something of a relief.”

The global recession has hurt Greek shipping and tourism, the country’s two biggest industries, and gross domestic product contracted in the second quarter, ending Greece’s run as the European Union’s fastest-growing economy. Karamanlis, 52, raised taxes to plug a swelling deficit and that policy, combined with a series of corruption cases, eroded his support two years after winning a second term.

Pasok, led by George Papandreou, 57, son of the former Greek premier of the same name, has 31.5 percent support compared with 25.1 percent for New Democracy, a poll broadcast on television station Mega on Sept. 2 showed. If replicated on election day, Pasok wouldn’t be able to form a majority in the 300-seat parliament.

Markets Tumble

Concern the election might produce a stalemate roiled financial markets yesterday. The difference in yield, or spread, between 10-year German Bunds and the equivalent Greek government debt widened to 143 basis points, the most since July 17. The difference shrank to 141.2 today.

“The market now has a finite timeframe for Greek political uncertainty, and of course uncertainty is something that no debt investor wants, hence the bonds are under pressure,” said Peter Chatwell, a fixed-income strategist in London at Caylon, the investment-banking unit of Credit Agricole SA.

The ASE benchmark stock index gained today after two days of declines, adding 11.02, or 0.5 percent, to 2,425.23 in Athens. It declined at much as 4.6 percent yesterday, the biggest slide in world equity markets.

Failure of either party to form a government would leave the option of forming a coalition, an outcome analysts say is unlikely, or another round of elections. A second vote would be held under a new electoral law which provides the leading party with additional seats, enabling it to secure an absolute majority in the chamber.

‘Positive Development’

The early poll is “a positive development” reducing the prospect of a long period of uncertainty, Konstantinos Manolopoulos, research head at Marfin Analysis SA in Athens, wrote in a note today. “The market will welcome any new government in case it achieves a strong majority in parliament.”

Karamanlis announced Sept. 2 he would call the vote and yesterday set the date, asking President Karolos Papoulias to dissolve the parliament on Sept. 8. Karamanlis said that he needed a new mandate to confront Greece’s mounting economic problems and that he wanted a quick vote to avoid a drawn-out election campaign that would be “the worst for the economy.”

Karamanlis will make his annual keynote economy speech tomorrow in the northern Greek city of Thessaloniki, effectively kicking off the election campaign.

Time to Deliver

“There is short-term political uncertainty but longer term the benefits should be more important as a new government would have a four-year time horizon to deliver” the change that is needed, Cheuvreux analyst Costas Theodorou said yesterday in a note to investors.

Greece is under scrutiny from the European Commission to rein in spending as its deficit is set to reach 6.1 percent of GDP this year, more than twice the EU’s 3 percent limit. To shrink that shortfall, Karamanlis’s government adopted a one-off levy on people earning more than 60,000 euros ($85,600) and froze the wages of civil servants. The government also raised taxes on cigarettes, alcohol, yacht owners and gambling to try to bring the deficit under control.

Louka Katseli, the socialist party’s spokeswoman on economic issues, pledged today to amend the tax on gambling winnings should they win the elections, spurring gains in the shares of Athens-based Opap SA, Europe’s largest publicly traded gambling company.

Karamanlis narrowly defeated Pasok in the last election in Sept. 2007 and holds 151 seats in the legislature.

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

Last Updated: September 4, 2009 12:02 EDT