Embattled Greek Prime Minister George Papandreou stepped down last night to allow the formation of a new caretaker government in Athens that will pass a European Union bailout plan, and, the hope is, avert chaos in international markets and Greece’s possible default.
Without a broad-based interim government in Greece, it is questionable whether the 130 billion euro bailout plan can be accepted politically. And without the bailout plan, Greece faces the prospect of leaving the eurozone and will not qualify for an 8-billion euro loan that it needs in December.
The Papandreou government is the third government in Europe to collapse this year amid fallout from a two-year debt crisis.
“A new government will help,” says a skeptical Philip Whyte of the Center for European Reform in London. “But even a unity government will be hard pressed to accept the measures that Greeks are being asked to swallow. Greece is having to cut spending faster than the country is presently contracting.”
EU officials meeting in Brussels today are expected to grill Greek Finance Minister Evangelos Venizelos on the new unity government and its plans for getting parliament to ratify the bailout deal, which is intensely unpopular. The bailout plan was agreed to on Oct. 26 by EU leaders and finance ministers, most prominently Germany’s Angela Merkel and France’s Nicolas Sarkozy, as part of a larger effort to meet the ongoing debt crisis in the eurozone.
Papandreou's Socialist goverment is the latest in Europe to topple under a debt crisis; the Irish and Portuguese governments succumbed earlier this year. Now the Italian government of Silvio Berlusconi is under terrific pressure. EU officials are meeting in Brussels today to further hash out the complex details of a debt bailout scheme that will be substantial enough to ward off market speculation that has resulted in higher borrowing rates for Italy.
The Greek opposition, led by Mr. Papandreou’s former college roommate Antonis Samaras, demanded the prime minister's resignation as one of the terms for joining an interim unity government. That government – to be formed in the next few days – will act as a bridge for new Greek elections, perhaps in mid-February.
Today Greeks are waiting for the naming of a new prime minister, which is being worked out in talks with Greek President Karolos Papoulias. The leading candidate appears to be Lucas Papademos, a former deputy chief of the European Central Bank who is currently teaching at Harvard University. Mr. Papademos is on his way to Athens today. Mr. Venizelos, the Greek finance minister who took his job last June in the midst of mass austerity protests in front of the Greek parliament, has also been mentioned as a possibility.
Greek officials say their country is solvent through early December, necessitating another tranche of the EU bailout funds to come through by then.
The deal involves a 50 percent write down on Greek bank debt and payouts from an EU stability fund created in May 2010 to aid struggling states and ward off aggressive markets. That fund is capitalized at 440 billion euros, and backed by limited guarantees of 780 billion euros, provided those guarantees are not withdrawn by other states crippled by the debt crisis. What EU finance ministers hope for is a so-called “bazooka,” or more serious and large fund, roughly $2 trillion, that will calm markets.
Could Italy be next?
At the top of the agenda in Brussels, alongside the Greek bailout deal, is a set of measures to stem the euro crisis from spreading to Italy and Spain. World leaders are pushing the EU to take strong actions to back the euro decisively and end the market uncertainty.
“The positive side of the Oct. 26 deal [by EU leaders] is that it marked the end of 18 months of a policy of denial that the whole of the region faces a pan-European banking crisis,” argues Mr. Whyte. “The problem is that what is economically achievable is politically impossible without changes in the institutional structures of the EU.”
At the G20 summit in Cannes, France, this weekend, US President Obama and British Prime Minister David Cameron bluntly urged EU leaders to put an end to the two-year old debt crisis issue quickly before it further pulls down markets overseas.
"European leaders understand that ultimately what the markets are looking for is a strong signal from Europe that they're standing behind the euro," Mr. Obama said in a press briefing after the meeting.
The latest crisis touched off when Papandreou balked on the bailout plan on Oct. 31 by calling – and a day later, rescinding – a public referendum on the deal. A referendum and its implied uncertainty about Greece's intentions toward the bailout, and even its standing in the eurozone, caused global markets to tumble and fostered fears that the euro crisis would deepen, threatening to sweep up Italy and other countries with large debts and undercapitalized banks.
Italy's crisis has deepened in recent days. Italy’s debt servicing costs on bond yields are approaching the 7 percent mark that prompted Ireland and Portugal to seek bailouts.
Prime Minister Silvio Berlusconi is under increasing pressure to step down, but he has vowed to finish his term, which ends in 2013. Thousands of Italians turned out in Rome over the weekend, calling for Mr. Berlusconi to resign after he was forced at the G20 summit to accept International Monetary Fund oversight of the country’s promised austerity plan.
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