Greek Prime Minister George Papandreou faced a vote of confidence in his new government in a fight vital to avert bankruptcy and stave off chaos across the eurozone and global markets. The prime minister was widely expected to squeak through in a vote due to take place around midnight, and a victory would almost certainly mean he would then get backing for vital austerity cuts and privatisations in a separate vote next week. “The alternative is unthinkable at this juncture,” ING bank analysts warned. The ruling party’s chief whip, Christos Protopappas, expressed confidence that his fellow Socialists would back the new government. “I am confident,” he told Vima Radio. “It is time for us to accept our responsibilities.”
A Greek default would hit European banks hard, but would also likely damage investor sentiment towards Ireland and Portugal, already being rescued, and Spain and even Italy and Belgium which have high debt loads. The eurozone issued an ultimatum to Greece on Monday, when it held back the latest slice of a rescue loan from last year. It told Greek lawmakers, in effect, to support the government and approve new, deep crisis action on the budget, even while recognising that this further delay and uncertainty could raise pressure throughout the eurozone.
Greece needs the 12-billion-euro ($17-billion-dollar) loan instalment to pay bills next month, but a much bigger issue for the whole eurozone is a new huge loan needed by Athens to avoid default on its debt in the months and years ahead. Germany insists this must involve losses for private lenders such as banks and insurance companies. But rating agencies have warned that this could spell default even if supposedly voluntary, and the European Central Bank has said that in that event it might be forced to cut lifeline financing to Greek banks. Analysts say that all these factors raise a serious threat of mayhem in the eurozone with repercussions on global markets, but the parliament in Athens to approve the austerity measures, and the EU and IMF then to approve further bailout funding. On Tuesday the Greek treasury raised 1.625 billion euros in an auction of three-month treasury bills. The sale was oversubscribed nearly three times over, but Athens ended up offering an interest rate of 4.62 percent, up from 4.06 percent in the last equivalent offer in May.
Despite deep public discontent and distress, Papandreou vowed on the eve of the vote there would be no backsliding on the 28-billion-euro ($40 billion) programme of cuts needed to unlock further aid needed to keep the country from going broke next month. “We are determined as a country, as a government to be on track with the programme, to move forward to do what is necessary in order to get our country into a fiscally much better and viable position,” Papandreou said after talks in Brussels on Monday with Herman Van Rompuy, president of the EU Council.
