Greek Premier Faces Revolt

EUROPE NEWS
NOVEMBER 2, 2011

Greek Premier Faces Revolt

Fears of Political Chaos Tank Global Markets as Europe's Bailout Plan Teeters

By ALKMAN GRANITSAS, MARCUS WALKER and COSTAS PARIS

ATHENS—Greece veered toward political chaos as a dispute over a planned referendum on the country's latest bailout threatened to topple the government and derail Europe's delicate effort to keep the crisis from spreading.

WSJ's Stephen Fidler reports Greek Prime Minister George Papandreou has indicated he is standing by his decision to hold a referendum on the debt rescue agreement reached by euro zone countries last week. Photo: Reuters/John Kolesidis

Greek lawmakers rebelled against the idea of a referendum in the highly indebted country, which was floated only a day earlier by Prime Minister George Papandreou as an attempt to shore up support for his drastic austerity policies, but which also risked wrecking Europe's plan for taming the debt crisis in the euro zone.

European leaders fear the shock waves from a Greek default, which could be triggered by a "no" vote in a referendum, could bring down other euro-zone governments and swaths of the Continent's banking system. The U.S. government worries such a financial crash in a key part of the world economy could hurt global growth.

Previously

For Ordinary Greeks, Big Bailout Adds Up to Years of Hardship

By Tuesday evening, Mr. Papandreou appeared to lack enough support in Parliament to hold a referendum on the rescue package for Greece that European leaders agreed on last week. But while prospects for his high-risk referendum receded, he was also fighting to hold on to power, leaving Europe fretting about the political instability in the country at the heart of the euro-zone crisis.

The high stakes gamble by the Greek prime minister is unlikely to pay off says Costas Paris, senior correspondent for Dow Jones.

Indeed, Mr. Papandreou in a statement issued around 1 a.m. Wednesday in Athens insisted that the referendum would go ahead and would give his economic overhauls a strong mandate. He suggested that early elections, which many of his critics are demanding, would be the greater threat to Greece's solvency.

A day of high political drama inAthens sent global financial markets gyrating and policy makers in Europe and the U.S. scrambling to catch up with events and plan for the worst. Only a week after European leaders agreed on a new €130 billion ($180 billion) bailout package for Greece that they hoped would calm down jittery markets, investors were forced to confront scenarios including the possible collapse of Greece's government.

Greek Prime Minister George Papandreou meets with German and French leaders ahead of the G20 summit in Cannes, as his decision to hold a referendum sends shockwaves throughout Europe. Courtesy of Reuters.

The renewed uncertainty over Greece's adherence to its bailout plan is expected to dominate the summit of the Group of 20 industrial and developing nations in Cannes, France, on Thursday and Friday. European leaders including German Chancellor Angela Merkel and French President Nicolas Sarkozy were due to hold emergency talks in Cannes on Wednesday ahead of the G-20 gathering. The German and French leaders, who weren't consulted in advance about the referendum idea, also summoned Mr. Papandreou to Cannes.

The political chaos in Greece threw global financial markets into turmoil Tuesday. Stocks fell sharply around the world. Bonds of vulnerable euro-zone countries such as Italy and Spain tumbled in price. The Dow Jones Industrial Average fell 297.05 points, or 2.48%, to 11657.96. In just two days the Dow has lost 573 points, a 5% decline.

The damage was even worse in Europe. Italian stocks plunged 6.8% while German and French markets each lost 5% or more. Of particular concern: yields on Italy's 10-year bonds soared to over 6.3% before settling at around 6.18%. Economists say borrowing costs above 6% are hard for Italy to sustain.

Asian markets fell sharply in early trading Wednesday, with Japan down 2%, South Korea down 2.4% and Australia down 1.9%.

"We have entered a new phase with greater doubts about the ability of certain European leaders to commit to policy measures in a decisive manner," said Mohamed El-Erian, chief executive of investment management firm Pimco.

Mr. Papandreou stunned his own party, the Greek nation and Europe on Monday evening by suggesting a referendum on his controversial strategy of slashing public spending and raising taxes in return for international aid loans. Drastic austerity measures have pushed Greece deep into recession and brought tens of thousands of protesters into the streets.

Mr. Papandreou didn't consult or inform other European leaders or even cabinet colleagues, including his finance minister, before proposing a referendum, according to people familiar with the matter.

The premier calculated that a referendum would allow him to recast the question facing Greece as whether it wants to continue being a member of Europe's inner circle, the euro currency zone. But on Tuesday, many in his party balked, fearing that the move could backfire disastrously.

Journal Community

Debt, Doubt and the Euro Zone

See country-by-country events in the crisis.

A "no" vote by Greeks would cut the country off from international funding, tipping it into bankruptcy and triggering a wider financial crash that could tear apart the euro zone. Analysts say a referendum could go either way: Most Greeks want to stay in the euro, but the majority also reject the harsh austerity measures.

The revolt within Mr. Papandreou's ruling Socialist party left the premier with just enough support in Parliament to survive in office, for now—but with too little support to launch his plebiscite. Under Greek law, Parliament must approve a proposal for a referendum.

"The referendum call is basically dead," said one senior Socialist party official.

The premier held an emergency cabinet meeting late Tuesday amid calls from numerous Greek politicians for early elections or a new, cross-party caretaker government of "national unity." Early Wednesday morning a government spokesman said the cabinet expressed unanimous support for the prime minister's referendum plan.

Analysts said Mr. Papandreou faces a struggle to survive in power in coming days. His next test is a vote of confidence in Parliament he has called for Friday.

The Socialists began Tuesday with a majority in Parliament of only three seats. By the evening, one lawmaker had resigned from the party and three others had declared their rejection of the referendum idea, leaving Mr. Papandreou short of the votes he would need to carry it out. The rebel lawmakers denounced his proposal as reckless.

no need

Greece's Prime Minister George Papandreou arrives for a cabinet meeting inside the parliament in Athens on Tueday.

Three Tense Days

Some key events in the euro zone this week

Wednesday: Sarkozy, Merkel, IMF's Lagarde, Eurogroup's Juncker and EU officials meet with Greek Premier Papandreou and Finance Minister Venizelos.

Thursday: G-20 summit starts; Sarkozy-Obama bilateral talks; Merkel-Obama bilateral talks

Friday: Greek no-confidence vote; summit ends.

Sources: French presidency of G-20; President Obama's schedule

Milena Apostolaki, a former junior cabinet minister, said she was leaving the Socialist camp because she flatly disagreed with the referendum. Eva Kaili, another Socialist deputy, called on Mr. Papandreou to recall plans for a referendum and proceed to a national unity government or else she would defect from the party. "If those things do not happen, I intend to [resign from the party]," Ms. Kaili said in a letter.

Veteran Socialist deputy and former cabinet minister Vasso Papandreou, who isn't related to the prime minister, also called for a national unity government. The final blow to the referendum plan came when lawmaker Hara Kefalidou also declared her opposition to a referendum.

"The turmoil that this act [of proposing a referendum] caused in Europe and the whole of the world has shown it to be a mistake," Ms. Kefalidou said in a letter to the president of Parliament that her office made public. "If it doesn't stop immediately, it could possibly be a fatal mistake," she wrote.

The turmoil in Greece caused consternation in other European capitals on Tuesday. Ms. Merkel and Mr. Sarkozy conferred in an emergency telephone call, after which they said they would press ahead with the accord struck between European leaders last week. The agreement would put Greece back on the path to growth, they said.

Mr. Sarkozy and Ms. Merkel also summoned Mr. Papandreou to meet them in Cannes on Wednesday, ahead of the G-20 summit. That invitation implied that Greece's embattled leader would remain in office for at least another day.

Many in Greece doubt that Mr. Papandreou will survive as prime minister for long. Even if he continues as premier, he risks becoming a lame duck following the rebellion among his Socialists against his referendum proposal.

Most analysts now expect Greece to hold early elections at some point in coming months. The likely outcome, opinion polls suggest, would be a center-right government led by Antonis Samaras, head of the conservative New Democracy party.

That would pose a new headache for Europe: Mr. Samaras has consistently denounced the austerity conditions that are tied to international aid for Greece, arguing that they are destroying the Greek economy. Instead, he wants tax cuts—which other European leaders have told him they aren't prepared to finance.

On Tuesday, Mr. Samaras came out against the idea of a referendum and called for elections instead.

—Tom Lauricella contributed to this article.

Write to Alkman Granitsas at , Marcus Walker at marcus.w

Greek Premier Faces Revolt