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Greek austerity standoff rattles euro zone
May 25, 2011 / 12:22 PM / 6 years ago

Greek austerity standoff rattles euro zone

ATHENS (Reuters) - The Greek government scrambled to resolve a standoff with its opposition over austerity on Wednesday, with one official warning the only alternative to more cuts was leaving the euro and bringing back the drachma.

<p>Riot policemen stand guard in front of the Bank of Greece during a rally in Athens, May 12, 2011. REUTERS/Yiorgos Karahalis</p>

Athens denied reports it was poised to call a referendum on Prime Minister George Papandreou’s new savings plan, which foresees up to 11.5 billion euros in state asset sales by the end of next year, and said it was still seeking a consensus on the deeply unpopular steps.

The showdown in Greece underscored rising political hurdles to an orderly resolution of the debt crisis that has plagued the 17-nation currency zone for the past 18 months and forced bailouts of Greece, Ireland and now Portugal.

It has also raised the risks that EU leaders could be forced to explore new, potentially more radical, policy options for dealing with Greece’s massive debt load, though they continue to rule out a coercive restructuring out of fear it would unleash a contagion tsunami, engulfing big countries like Spain or Italy.

Luxembourg Prime Minister Jean-Claude Juncker confirmed late on Tuesday that the International Monetary Fund was refusing to release its share of rescue funds for Greece next month unless its European partners committed to providing Athens with new aid to fill a 27 billion euro funding gap in 2012.

But countries like Germany, where public opposition to further bailouts runs high, are loath to promise new aid until Athens shows it can deliver on its new austerity and privatization pledges, and has broad support for this path.

The main opposition party in Greece has vowed to fight the measures, however, raising doubts about whether the country will secure a crucial new tranche of aid it desperately needs to cope with a looming 13.4 billion euros debt funding crunch.

“I am forced to speak openly,” Greece’s EU Commissioner Maria Damanaki was quoted as saying by the semi-official Athens News Agency. “Either we agree with our lenders on a program of tough sacrifices ... or we return to the drachma.”

It was the first time a prominent Greek official has publicly raised the prospect of reintroducing the currency that Greece abandoned when it joined the euro zone in 2001.

Damanaki, Europe’s Fisheries Commissioner, was appointed by Papandreou’s ruling socialists, who enjoy a majority in parliament but have seen their support slide since securing a 110 billion euro EU/IMF bailout for the country one year ago.


The euro fell to a record low versus the Swiss franc and its worst level in two months against sterling.

The Paris-based Organization for Economic Cooperation and Development warned in its twice yearly economic outlook that debt levels in Greece, Ireland and Portugal were unsustainable if market interest rates stayed high for long.

It offered three policy options for addressing the problem -- including more official aid, rescheduling of outstanding debt and a more far-reaching restructuring -- but stopped short of endorsing any of them, making clear each path carried big risks.

In a rare bit of good news for the bloc, Finland’s parliament backed a 78 billion euro bailout for Portugal despite fierce opposition from the populist True Finns party, which scored unexpectedly strong gains in an election last month.

A rejection would have endangered the entire aid package since approval must be unanimous among the bloc’s member states. In the end the vote in Helsinki was not even close, 137-49 in favor of the country’s contribution to the bailout.

In Athens, a government spokesman denied reports that Papandreou planned to hold a referendum on the new austerity steps he is proposing, but said such a step remained an option.

“At this critical hour we need national consensus. I am open to all good ideas and realistic proposals,” Papandreou told reporters after meeting President Karolos Papoulias.

On Monday, the government detailed privatization plans that are part of a goal to raise 50 billion euros by 2015 to pay down debt, starting with divestments in Hellenic Postbank (GPSr.AT), OTE Telecom (OTEr.AT) and the two biggest ports.

It also said it was working with EU and IMF inspectors to finalize extra fiscal savings worth 6.4 billion euros in a bid to meet deficit reduction targets that are at risk because of a deep recession and rampant tax evasion.

The conservative New Democracy party, which last year voted against Greece’s 110 billion euro bailout deal, claims austerity is choking the economy and impeding it from growing out of the debt mess.

It has vowed to fight the measures. Underlining public hostility to further austerity, Greece’s public sector union has called for a 24-hour strike in June.


A team of inspectors from the European Commission, European Central Bank and IMF was due to meet New Democracy leader Antonis Samaras later to try to convince him to reverse course.

The envoys are in Athens to decide whether the government should receive a fifth 12 billion euro tranche from the bailout package, which was sealed one year ago.

European policymakers have acknowledged over the past week that they are exploring a soft form of “voluntary” restructuring that might see the maturities on outstanding debt extended.

But members of the European Central Bank have warned against such a move and ratings agencies have said they would consider it a “credit event,” or default.

A Reuters poll on Wednesday showed a restructuring of Greek debt would have widespread repercussions for the euro zone’s banking system, with 14 of 21 respondents predicting such a step would trigger bank recapitalizations.

“Any restructuring at all, whether voluntary or involuntary, will lead to a big wave of risk aversion,” said Philip Shaw, chief economist at Investec. “It would erode the capital bases of banks -- particularly in Greece but to a significant extent in France and Germany.”

(Reporting by Renee Maltezou and Dina Kyriakidou in Athens, Swaha Pattanaik and William James in London, Ritsuko Ando in Helsinki)

Writing by Noah Barkin, editing by Mike Peacock

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