Business World

Friday 22 September 2017

Crisis talks on referendum held ahead of G20 summit

bailout

Simon Kennedy and Helene Fouquet

€130bn

and a 50pic writedown in Greek debt was the deal Mr Papandreou had signed up for in return for continued austerity in Greece

European leaders last night urged Greek Prime Minister George Papandreou to swiftly spell out how he intends to stick to the terms of a bailout plan after he handed voters a veto over the week-old package.

Crisis talks were under way in the French resort of Cannes on the eve of a Group of 20 summit after Mr Papandreou was summoned by European counterparts to explain his call for a referendum that risks delaying aid which the country needs to avert default. In Athens, Greek lawmakers debated a confidence motion that could bring down his government.

The guardians of the euro "won't accept" a break from last week's agreement, Luxembourg Prime Minister Jean-Claude Juncker told reporters in Cannes. German Chancellor Angela Merkel said: "We have to get to the point where we know exactly what comes next."

The confusion sowed by Mr Papandreou threatens to unravel an October 27 crisis-fighting strategy and may scupper Europe's hopes of using the G20 meeting as a showcase for that plan and to seek financial assistance for their efforts. The summit will open officially today with a lunch-time discussion on Greece and the euro-area debt crisis.

"Investors must be forgiven for hoping that the G20 will agree to do something meaningful at a global level to resolve the eurozone crisis," said Andrew Kenningham, an economist at Capital Economics in London. "But it looks as if it will do little more than urge eurozone governments to come up with a more convincing solution of its own."

Ms Merkel, French President Nicolas Sarkozy, IMF managing director Christine Lagarde and EU officials ended the first round of talks and were set to be joined by Mr Papandreou late last night in Cannes.

European Commission President Jose Barroso said the referendum may hold up Greece receiving €8bn of already delayed support. "In the EU, we have agreed on far-reaching measures to support Greece," he said. "But for those measures to be implemented it is critically important to have stability in the country."

Europe's woes are returning G20 leaders to the crisis footing they adopted three years ago after the collapse of Lehman Brothers. Australian Prime Minister Julia Gillard said in Cannes that Europe faced questions that "need to be answered and answered quickly".

Mr Papandreou is betting the referendum will hand him a "clear mandate and strong message within and outside Greece on our European course and our participation in the euro". Greek lawmakers will complete their debate on November 4 with a vote of confidence in his administration.

The calling of the twin polls shocked leaders and investors just five days after Mr Papandreou signed up for a plan that required continued austerity at home in return for €130bn in aid and a 50pc writedown on Greek debt. The strategy would also boost the spending power of Europe's €440bn rescue fund to €1trillion .

The risk is that Greek rejection of the plan would spark a disorderly default and call into doubt the country's membership of the euro. Mr Papandreou is gambling voters will put their support for the single currency over their dislike of deeper austerity measures amid a recession in its fourth year.

Emergency

Some 46pc of 1,009 people polled last week by Greece's 'To Vima' newspaper said they'd oppose the plan at such a referendum. In the same survey, more than seven in 10 favoured Greece remaining in the euro.

In Rome, Italian Prime Minister Silvio Berlusconi called a cabinet meeting last night to pass emergency economic measures as investors respond to Greece's woes by questioning the creditworthiness of the euro-area's third largest economy. Its borrowing costs held near euro-era highs yesterday, with the 10-year bond yielding more than 6pc -- more than triple Germany's -- even as the ECB continued to buy the country's bonds.

"A crisis in Italy seems increasingly probable and would do much to expose the inadequacies of the bailout mechanism as a whole," said Matt King, global head of credit strategy at Citigroup Inc in London.

Europe's bailout fund yesterday delayed a €3bn bond sale, with spokesman Christof Roche citing "market conditions". The European Financial Stability Facility may await the outcome of the G20 summit before selling the debt.

Investors today will split their attention between Cannes and a meeting in Frankfurt of the ECB governing council, which will be chaired for the first time by President Mario Draghi. They are looking for clues on whether the bank will boost its buying or bonds or shift toward lower interest rates.

Signs that the euro area is sliding toward a recession were underscored yesterday as data showed manufacturing shrank for a third month in October.

"After the last few days especially, blunt reassurance needs to be given that the Italian and Spanish bond markets will not be allowed to go the way of Greece, Ireland and Portugal," said Marchel Alexandrovich, an economist in London at Jefferies International. (Bloomberg)

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