Greece Will Be Told No Alternative to Budget Cuts as EU Races to Save Pact
European leaders are set to tell Greek Prime Minister George Papandreou he has no alternative to the budget cuts imposed in a week-old debt-crisis strategy that they are racing to prevent from unraveling.
Papandreou, his hold on power weakening, was summoned to Cannes, France, for emergency talks on the eve of a Group of 20 summit where he will hear from French President Nicolas Sarkozy that the “only way to resolve Greek debt problems” is through a deal hammered out in a six-day crisis-management marathon. German Chancellor Angela Merkel said today that policy makers “must bring calm to the euro.”
Papandreou triggered the latest upheaval in the two-year- long crisis by abruptly announcing on Oct. 31 a parliamentary confidence vote and his desire to hold a referendum on the rescue pact. Global stocks, the euro and bonds of debt-strapped countries tumbled yesterday as concern of a disorderly Greek default mounted.
Papandreou will join a group at about 8:30 p.m. comprising Sarkozy, Merkel, International Monetary Fund Managing Director Christine Lagarde, as well as European Union authorities, according to a statement from Sarkozy’s office. They will have met at about 5:30 p.m. without Papandreou.
Japanese Finance Minister Jun Azumi said today in Tokyo that “everyone is perplexed” by Greece’s referendum decision and that the issue will be discussed at the Cannes summit.
Italian Prime Minister Silvio Berlusconi, under pressure to cut Europe’s second-biggest debt load, convened a special meeting of advisers late yesterday to discuss budget-cutting plans. Like Sarkozy, Berlusconi held crisis talks with Merkel yesterday. His key cabinet ministers will meet today to draft measures for the country’s financial-stability legislation, the Italian news agency ANSA said, citing government officials.
The euro rose against the dollar today, gaining 0.6 percent to $1.3784 as of 12:21 p.m. in London. It fell 3.1 percent over the previous two days.
The Stoxx Europe 600 Index was little changed after sinking the most in five weeks yesterday. German bonds fell after surging yesterday as investors sought the safest assets. The Greek two-year yield reached 92.35 percent today, a record high.
Papandreou’s announcement, which Sarkozy said “surprised all of Europe,” threatens to overshadow the Nov. 3-4 Group of 20 summit in Cannes. European leaders had designated the talks as a stage to present their plan to stamp out the crisis and end the threat to the global economy.
“The referendum will be a clear mandate and strong message within and without Greece on our European course and our participation in the euro,” Papandreou told his ministers in Athens late yesterday, according to an e-mailed transcript. It will “ensure this course in the most decisive way.”
EU officials had hoped to use the Oct. 27 rescue agreement, which includes renewed commitments to fiscal austerity as well as new rescue resources, to anchor their economic agenda at the G-20 summit and secure support from their counterparts. Now, officials meeting as the confidence vote plays out in Athens will be called on to assess the deal’s -- and the euro’s -- future, especially if Papandreou’s government falls and Greece comes under more pressure to default or leave the common currency.
European leaders 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 of the existing bonds’ face value.
The deal to reduce Greece’s debt load will do nothing to aid the country’s recovery from recession, opposition New Democracy leader Antonis Samaras said on Oct. 27. Papandreou’s majority meanwhile slipped as his support narrowed to 152 lawmakers in the 300-deputy parliament amid a party rebellion.
Whether the EU’s plan would succeed “was a matter for debate. But at least there was a plan,” Yiannis Koutelidakis, an economist at Fathom Financial Consulting in London, said in a note yesterday. “The risks engendered by this move are profound for the euro in general, not just for Greece as the expulsion of any one member state would critically undermine the Economic and Monetary Union.”
Such uncertainty “will likely block any” governments outside the euro area from stumping up cash for its reworked rescue fund as the continent’s leaders would like, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc. While Brazil and Russia have signaled a willingness to help, Chinese officials say they want more details.
The leaders of Brazil, Russia, India, China and South Africa -- the so-called BRICS -- may also meet in Cannes today, Sergei Prikhodko, Russian President Dmitry Medvedev’s foreign policy aide, said yesterday. Chinese President Hu Jintao, who will also meet Sarkozy today, told Le Figaro newspaper yesterday that he wants stability in the euro area.
A lack of outside assistance will leave the European Central Bank under pressure to keep buying the bonds of stressed states, Cailloux said. While Sarkozy’s office said ECB President Mario Draghi would be in Cannes after taking office yesterday, his spokesperson said today he won’t be because of the need to chair tomorrow’s meeting of the central bank’s governing council
Nomura Holdings Plc economist Jens Sondergaard said although he expects the ECB to leave its benchmark rate at 1.5 percent this week, the “adverse market reaction” to Greece’s referendum call leaves a one-in-three chance of a 25 basis-point reduction.
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