Europe May Withhold Half of Greek Payment to Pressure Athens

Greeks Face Cuts
Demonstrators gesture and wave Greek flags in front of the Greek parliament building during protests against austerity cuts in Athens. Greek Prime Minister George Papandreou aims to quell growing dissent within his Socialist party over deeper austerity measures as voters' patience wears thin and public protests mount. Photographer: Kostas Tsironis/Bloomberg

European governments weighed withholding half of Greece’s next 12 billion-euro ($17.2 billion) aid payment, seeking to keep the country solvent while maintaining pressure on the government to slash the debt that pitched the euro area into crisis.

Euro-area finance ministers may authorize only a 6 billion-euro loan to tide Greece through bond redemptions in July, while further aid hinges on Greek budget cuts, Belgian Finance Minister Didier Reynders said.

“We will in any case try to release the necessary funds for the short term,” Reynders told reporters before a meeting of euro-area finance ministers in Luxembourg that began late yesterday.

Europe’s financial brinksmanship ran in parallel with Greek Prime Minister George Papandreou’s effort to save his government from collapse and win parliamentary backing for spending cuts, tax increases and state-asset sales needed to keep bailout funds flowing.

Spanish Economy Minister Elena Salgado said the focus is still on paying out the full 12 billion euros, telling reporters after four hours of talks: “You can’t divide it.”

Group of Seven finance officials, including representatives of euro members Germany, France and Italy, held telephone consultations during the gathering on the Greek crisis, a U.S. official said.

The euro-area finance ministers’ meeting coincided with the start of a three-day Greek parliamentary debate in Athens over a confidence vote in a new cabinet at what Papandreou called a “critical crossroads.” Papandreou has 155 seats in the 300-seat parliament.

Referendum Call

Papandreou said he planned to hold a referendum later in the year for changes to the constitution that would reform the political system in the country. The prime minister said his goal was to tackle the root causes of the country’s debt and deficits that are “symptoms of the illness, not the cause.”

The new Greek finance minister, Evangelos Venizelos, who was named in a cabinet overhaul three days ago, came to Luxembourg with a “strong commitment” to the planned 78 billion euros in budget cuts that provoked street protests last week. “We can achieve our target thanks to the efforts of our people and thanks to the cooperation and the assistance of our partners,” Venizelos said.

More than 47 percent of 1,208 Greeks surveyed by Kapa Research SA for To Vima newspaper oppose the wage and spending cuts and higher taxes, and want early elections. Almost 35 percent said the package should be approved.

‘Ambitious’ Overhaul

Germany, which as Europe’s largest economy is the biggest guarantor of aid packages to Greece, Ireland and Portugal, insists on an “ambitious” economic overhaul in Athens, Finance Minister Wolfgang Schaeuble said.

“We will surely work on laying the groundwork for paying out the tranche,” Schaeuble said. “It also depends on Greece making the necessary decisions with a fundamental consensus of the political parties so that we can be confident that Greece will live up to its commitments.”

Germany raised the prospects for a second aid package on June 17 by dropping calls for a mandatory bond exchange that might lead rating companies to declare Greece in default. Chancellor Angela Merkel’s concession gave a lift to stocks, bonds and the euro, spurring optimism that Europe would get ahead of the debt crisis that has exposed the weaknesses of the 17-country currency union.

While Germany bowed to European Central Bank and French demands not to compel investors to buy new Greek bonds as old ones expire, the lines are blurry between a “voluntary” and “compulsory” rollover that would lead rating companies to declare Greece in default.

On the table are incentives for bondholders to maintain their exposure to Greece, said Luxembourg Prime Minister Jean-Claude Juncker, chairman of the talks. He ruled out an agreement tonight on a new three-year package for Greece, pointing to July for a “final and overall answer.”

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