Failure to find political consensus on austerity in Greece threatened to plunge the euro zone deeper into crisis on Wednesday, eclipsing Finnish approval of EU/IMF aid for Portugal after weeks of bitter debate.
The Greek government denied newspaper reports
that it was poised to call a referendum on additional austerity measures to deal with its debt crisis. Instead, Prime Minister George Papandreou said he was still seeking agreement.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 euro zone partners committed new aid for Athens to fill a 27 billion euro funding gap in 2012.
Those partners have made clear that no new aid on top of the 110 billion euros ($155 billion) bailout Greece secured last year can flow until Athens delivers on new austerity and privatization pledges and shows it has broad support for them.
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.
The showdown in Greece has highlighted the rising political hurdles to an orderly resolution of the debt crisis that has plagued the 17-nation currency zone for the past 18 months.
It has also raised the risks that European leaders could be forced to explore new, potentially more radical, policy options, though they continue to rule out any coercive restructuring of Greek debt before 2013 out of fear it would unleash a contagion tsunami, engulfing bigger countries like Spain or Italy.
"Politicians it seems are pandering to their political agendas instead of working out what will be best in the long run," said Harpreet Parhar, a credit strategist at Credit Agricole CIB in London. "Unfortunately, this situation of conflicting headlines from Greece will continue for the foreseeable future."
The euro fell to a two-month low against sterling and a record low versus the Swiss franc. It dipped below $1.40 for the first time in over two months on Monday and has been hovering just above that level since.
The Paris-based Organization for Economic Cooperation and Development (OECD) warned in its twice yearly economic outlook that debt levels in Greece, Ireland and Portugal -- the three euro zone countries that have sought aid -- 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.
FINN WIN
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 had 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, OTE Telecom 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 the EU/IMF 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 and, underlining public hostility to further austerity, Greece's public sector union has called for a 24-hour strike in June.
SAMARAS SESSION
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 it will receive a fifth 12 billion euro tranche from the bailout package it sealed one year ago. Papandreou's socialists have a comfortable lead in parliament but have been sliding in opinion polls.
On Tuesday, Moody's became the latest ratings agency to warn of a chain reaction of severe consequences if Greece did not receive the aid and was allowed to default next month.
The ECB and the ratings agencies have told politicians that options they are exploring to lengthen the maturities on privately held Greek debt would be interpreted as a default-like "credit event", triggering further downgrades and disqualifying Greek bonds as collateral.
That leaves the EU with few options for dealing with Greece's 330 billion debt mountain and filling the funding gap that looms next year.
REUTERS
