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European Stocks Drop on Greek Impasse; Spanish Banks Fall

European stocks dropped for a second day, to the lowest level in almost four months, as investors awaited a resolution to the political impasse in Greece and as Spanish credit risk surged.

Bankia SA led a selloff in Spanish banks. Kloeckner & Co. and Mediaset SpA (MS) both plunged more than 8 percent after reporting first-quarter results. ING (INGA) Groep NV and Carlsberg A/S (CARLA) paced advancing shares.

The Stoxx Europe 600 Index (SXXP) lost 0.3 percent to 249.73 at the close of trading, the lowest since Jan. 13, as the euro weakened for an eighth day. The Stoxx 600 has tumbled 8.3 percent from this year’s high on March 16, trimming this year’s advance to 2.1 percent.

“The real concern isn’t about Greece, it’s about the euro and whether it breaks up — that is key,” Mark Tinker, a fund manager at AXA Framlington Investment Management said on Bloomberg Television in London. “We don’t make a big economic scenario after a couple of days of moves, but I think there is a lot of anxious market repositioning going on right now.”

The benchmark Stoxx 600 yesterday dropped 1.7 percent after Antonis Samaras, the leader of Greece’s biggest political party, failed to reach an agreement on a new government and the mandate passed to left-wing leader Alexis Tsipras, who opposes austerity measures required for the nation’s financial rescue.

The euro fell to 1.2948 against the dollar at 4:25 p.m., for its longest losing streak in 3 1/2 years, as Tsipras meets with leaders of New Democracy and Pasok, the two Greek parties that supported austerity.

Political Stand-off

Tsipras yesterday squared off with political leaders before talks on forming a coalition, handing them an ultimatum to renounce support for the European Union-led rescue if they wanted to enter government.

The stand-off since the inconclusive May 6 election has reignited concerns over Greece’s ability to comply with the terms of its two bailouts negotiated since May 2010. The country is again facing the risk of an exit from the euro.

National benchmark indexes fell in 14 of the 18 western- European markets. France’s CAC 40 lost 0.2 percent and the U.K.’s FTSE 100 declined 0.4 percent, while Germany’s DAX added 0.5 percent. Spain’s IBEX 35 Index sank 2.8 percent, its lowest close since October, 2003.

The cost of insuring against a Spanish default surged to a record on concern a bailout of Bankia (BKIA) won’t fend of a banking crisis triggered by bad real-estate loans. Credit-default swaps insuring Spanish government debt rose 13 basis points to 512 basis points a 10:55 a.m. in London, according to data compiled by Bloomberg.

‘Zombie Bank’

Bankia tumbled 5.8 percent to 2.13 euros, the lowest since it listed its shares in July 2011, as JPMorgan Chase & Co. downgraded the Spanish lender to underweight, the equivalent of a sell recommendation.

“While there is no danger of an imminent collapse at Bankia, there is a risk that it becomes a zombie bank, which has to rely on the European Central Bank to fund it over the long term,” said Roger Francis, an analyst at Mizuho International Plc in London.

Spanish 10-year government bonds extended a decline, pushing the yield on the securities above 6 percent for the first time since April 27. The yield climbed 20 basis points, or 0.17 percentage points, to 6.04 percent.

Banco Santander SA (SAN), Spain’s largest lender, dropped 4.5 percent to 4.64 euros and Banco Bilbao Vizcaya Argentaria SA (BBVA) retreated 4.7 percent to 5.01 euros.

Kloeckner, Mediaset

Kloeckner tumbled 8.2 percent to 8.33 euros after Europe’s largest independent steel trader reported a first-quarter loss of 10 million euros ($13 million), wider than the average analyst estimate for a 900,000 euro-loss. The company said its 2012 earnings will improve only if Europe’s economy recovers.

Mediaset lost 11 percent to 1.45 euros, the lowest since it sold shares to the public in July 1996. The broadcaster reported an 85 percent slump in first-quarter net income to 10.3 million euros after the close of trading yesterday on lower advertising sales. Analysts estimated net income of 6.5 million euros on sales of 984 million euros, according to a Bloomberg survey.

Mapfre SA (MAP) retreated 6.3 percent to 1.94 euros, the most since April 2010. The Spanish insurer reported a 13 percent drop in first-quarter net income to 271.4 million euros. That still beat the average analyst estimate of 250.3 million euros in a Bloomberg Survey.

ING, Carlsberg

ING paced advancing shares, climbing 1.7 percent to 5.08 euros. The biggest Dutch financial-services company reported earnings excluding one-time gains and losses of 705 million euros, surpassing the 632 million-euro estimate of analysts.

Net income sank 51 percent after a charge for a potential settlement of a U.S. probe offset a gain from the sale of its U.S. online bank.

Carlsberg jumped 3.8 percent to 490 kroner as the world’s fourth-biggest brewer confirmed its full-year outlook. The company reported a 43 percent drop in first-quarter operating profit, excluding some items, to 574 million kroner ($100 million) as it sold less beer in Russia. That missed the average analyst projection for 845 million kroner.

Lanxess AG (LXS) advanced 6.4 percent to 61.83 euros after the maker of synthetic rubber said growth in earnings may touch 10 percent this year, outstripping analysts’ estimates, as demand surges in emerging markets and the U.S. recovers.

For 2012, profit will probably grow 5 percent to 10 percent from last year’s 1.1 billion euros. Analysts estimated growth of about 6 percent.

ITV Plc (ITV) rose 2.2 percent to 82.50 pence. The U.K.’s biggest commercial broadcaster said it expects to outperform the TV advertising market in the first half and forecast ad revenue to increase by about 3 percent in the first half.

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Spain Meets Bond Target While French Borrowing Costs Fall

Spain Meets Bond Auction Target as French Borrowing Costs Fall

The Spanish Treasury sold 2.52 billion euros of bonds, exceeding its maximum target.

The Spanish Treasury sold 2.52 billion euros ($3.31 billion) of bonds, exceeding its maximum target. Still, Spain had to pay 4.037 percent to sell debt for three years, up from 2.617 percent at a March 1 sale.

The auction was the first long-term debt sale since Standard & Poor’s lowered the nation’s credit rating last week, leaving Spain three notches from junk status. The effect of the European Central Bank’s 1 trillion-euro three-year refinancing operation is also fading, leaving a clearer indication of demand.

“This is a proper, good, honest market now,” Peter Chatwell, a bond analyst at Credit Agricole SA in London, said in a telephone interview. “Expectations of big, blow-out auctions need to disappear. The yields are all sub-5 percent, that’s a comfortable level.”

The yield on Spain’s existing five-year benchmark declined 7 basis points to 4.7 percent at 12 p.m. in Madrid, and the yield on the benchmark 10-year bond fell 3 basis point to 5.82 percent. Spain also sold two five-year bonds at 4.752 percent and 4.96 percent.

France held its final auction before the nation chooses its next president in a final round of voting on May 6. The Treasury sold 3.32 billion euros of 10-year bonds at an average yield of 2.96 percent, down from 2.98 percent on April 5, as part of an auction of 7.43 billion euros of government debt. France’s 10- year bond yield fell 3 percent to 2.92 percent after the sale.

Rating Cut

S&P cut Spain’s credit rating two levels to BBB+ from A on April 26, citing concerns that losses buried in the country’s banking system may overwhelm government efforts to shore up public finances. The government has embarked on a third attempt to clean up the banking industry since a real estate bubble burst in 2008, leaving them hobbled with bad loans and overvalued assets.

Spanish bonds were the worst-performing of 26 sovereign- debt indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies in April, with losses of 1.8 percent. Italian securities were second worst, dropping 1.3 percent, after gaining 11 percent in the first quarter.

In February, the Spanish government increased the ratio of provisions to be set aside for land to 80 percent, while raising the ratio on unfinished developments to 65 percent and to 35 percent for other troubled assets including finished houses. The new provisioning rules cover about 180 billion euros of assets.

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EU ministers close to deal on new bank rules

Denmark’s finance minister says she and her European Union counterparts are close to a deal to force banks to build up bigger capital cushions against financial shocks.

Early Thursday, after more than 15 hours of debate, Margrethe Vestager said only a few “technical issues” needed to be ironed out before the ministers’ next meeting in two weeks.

The EU is in the process of writing an international agreement on capital defenses for banks into European law that regulators hope will prevent a repeat of the 2008 financial crisis.

The so-called Basel III deal would force lenders to increase their highest-quality capital gradually from 2 percent of the risky assets they hold to 7 percent by 2019. An additional 2.5 percent would have to be built up during good times.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

BRUSSELS (AP) _ European finance ministers were divided Wednesday on how the region’s banks can protect themselves from future financial shocks.

The European Union is in the process to writing an international agreement on capital defences for banks into European law. This would determine the level of risk Europe’s banks can take and what regulators can do to ensure that financial crises like the one brought on by the collapse of U.S. investment bank Lehman Brothers in 2008 do not happen again.

The so-called Basel III deal would force banks gradually to increase their highest-quality capital _ such as equity and reserves _ from 2 percent of the risky assets they hold to 7 percent by 2019. An additional 2.5 percent would have to be built up during good times.

But several countries, including the U.K. and Sweden, want to require their banks to build up even higher defenses without having to go to the European Commission, the EU’s executive arm in Brussels, for approval. There was also some disagreement over what should count as capital. Some countries are warning that Europe could be seen as softening banking rules at a time when it is already under close scrutiny from international investors.

“If we duck the challenge of implementing Basel we could face very important challenges to confidence in Europe this year,” warned George Osborne, the U.K.’s Treasury chief.

Basel III was agreed by the world’s leading economies after the 2008 financial crisis demonstrated that many banks did not have enough of a capital cushion to absorb sudden losses on loans and other risky activities. Once agreed, the new rules would apply to more than 8,300 banks in Europe, forcing them to build up billions in extra capital by selling shares or assets or reining in bonuses and dividends.

The 2008 financial panic that followed Lehman’s collapse hit Europe hard. Between 2008 and 2010, governments across the 27-country-bloc spent (EURO)4.6 trillion ($6.1 trillion) propping up struggling banks.

What complicated efforts even more was that the open borders in the EU allow banks to operate freely across the bloc, but when lenders ran into trouble it was national governments _ and taxpayers _ who had to foot the bill. While the EU is now striving for a single set of banking rules, there is still no pan-European bank resolution fund that could relieve national governments.

The U.K., which had to save three major banks, has seen its debt load almost double since 2007. Meanwhile much smaller Ireland had to seek an international bailout to help stem the losses of its domestic lenders. And many economists fear that the economic recession in Spain may soon reveal massive bank losses there.

Now, the U.K. is leading a group of countries that want to be able to force their own banks to have bigger defenses than the ones prescribed by the pan-European rules without first getting approval from Brussels.

“We should make it clear that the crisis did not originate exclusively from weak fiscal policy. It originated also from insufficiently strong banks,” said Polish Finance Minister Jacek Rostowski. “So therefore a group of countries including Poland, the Czech Republic, Sweden and the United Kingdom are very determined to see that banking systems in the future should be as healthy as we expect the fiscal side, the budgetary side, to be kept.”

That demand is opposed by France and the Commission, which fear that jacking up capital requirements in one country could force banks based there to cut down lending by their foreign subsidiaries. That, they argue, could hurt small states that don’t have a big domestic banking system.

To bridge the divide between the two camps, Denmark, which currently holds the EU presidency, has proposed a compromise that would allow national regulators to require an extra capital buffer of 3 percent. Anything beyond that would have to be approved by the Commission in Brussels, which would examine not only the level of risk in the home state but also the potential impact in neighboring countries.

After several hours of public discussion, finance ministers retreated into bilateral talks. A possible compromise could include requiring not the Commission, but another European supervisor _ the European Systemic Risk Board, which is led by the European Central Bank President Mario Draghi _ to approve higher national buffers.

If they cannot find agreement Wednesday, several ministers said they hoped a deal could be struck at their next meeting in two weeks. Once finance ministers have struck a deal, they have to negotiate a final agreement with the European Parliament.

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Debate Grows as Europe Fears Return of a Crisis

Angela Merkel, the Chancellor of Germany

Angela Merkel, the Chancellor of Germany (Photo credit: Wikipedia)

BERLIN — The European financial crisis has shown signs of reigniting in recent days, sharpening the debate between the champions of austerity and a growing chorus urging more expansionary policies to promote growth.

Even the traditionally hard-line International Monetary Fund called on Tuesday for stronger European nations to ease the fiscal brakes by stretching out budget cuts over a longer period. But if that message was intended foremost for Germany, it seemed destined to fall on deaf ears: with two state elections coming up next month, Chancellor Angela Merkel is unlikely to shift her position, popular with voters, against additional help for the economies of struggling European partners.

“We don’t see the need that perhaps other countries see to boost growth through additional increases in expenditures,” said a senior official in the German Finance Ministry, speaking on the condition of anonymity.

“Instead, we see quite clearly, and will remind our partners about their responsibilities from Toronto,” the official said, referring to commitments made at the Group of 20 summit meeting in June 2010, “to cut their deficits in half and stabilize their debt levels.” At the same time, the official said that Germany hoped other countries would join in increasing the International Monetary Fund’s resources to help it combat the crisis.

Politics as much as economics is adding to the sense of uncertainty in Europe. President Nicolas Sarkozy of France, who is trailing the Socialist candidate François Hollande in the polls before the first round of the presidential election on Sunday, has joined his opponent in promoting pro-growth policies. In Greece, nationalist anti-German fringe parties are gaining strength ahead of next month’s parliamentary election.

The German state elections may not directly affect the federal government in Berlin, but they distract from Continent-wide concerns and crisis management while thrusting parochial issues to the forefront. The German government does not have a mandate to share further the burden of the common currency on less competitive economies like those of Greece, Portugal, Ireland and, increasingly, Spain and Italy.

What seems certain, however, is that the crisis will continue to fester until new measures are taken to address its root causes. Borrowing costs for struggling southern European countries like Spain and Italy have begun to rise again as the effect of the European Central Bank’s injection of about $1.3 trillion in cheap loans into the banking system in December and March has faded much faster than expected. The three-year loans were meant to buy time for struggling governments and financial institutions, but the breathing room appears likely to be measured in months rather than in years.

The recent shift has underscored that there have been no substantive fixes beyond promises by countries to reduce their budget deficits. “It looks like it’s coming back with a vengeance, largely because none of the underlying problems have been solved,” said Philip Whyte, a senior research fellow at the Center for European Reform.

Mr. Whyte said that despite two years of crisis management, the fundamental structure of the euro zone remained intact, with lower-productivity economies in the south yoked to higher-productivity economies in the north, which prevents the laggards from competing through a currency devaluation.

“The E.C.B. bought time, but what it ended up doing was simply tightening the link between national banks and their sovereigns,” Mr. Whyte said. “They made the system more vulnerable if markets started losing faith in debt sustainability in countries like Spain.”

Yields on Spain’s 10-year bonds climbed above 6 percent on Monday, though they fell slightly on Tuesday after a successful auction of short-term debt by Spain’s treasury. Spain has emerged as the central test this year after missing its deficit targets as it slips back into recession. The government in Madrid has had a difficult time reining in spending by the 17 regional governments.

A bailout of Spain would be much costlier than one for smaller economies like those of Greece, Portugal or Ireland, testing the resources of the euro zone countries. Many economists, particularly in the United States, have argued that Spain has to stimulate its economy with additional spending if it hopes to return to economic growth, an argument rejected by the German government.

In an interview with the German newspaper Frankfurter Allgemeine Zeitung on Tuesday, Christine Lagarde, the managing director of the International Monetary Fund, said she was concerned about the health of Spanish banks and warned against slashing spending too quickly. It is not a view shared here in the German capital.

In an interview with Reuters on Tuesday, Germany’s finance minister, Wolfgang Schäuble, praised Spain for making difficult economic changes. “You don’t win back trust overnight,” Mr. Schäuble said, adding that Spain was following the right path by cutting spending. German officials have also recommended changes in labor markets as a longer-term strategy to promote growth.

As deficits balloon in countries across Europe, Germany continues to watch its deficits and financing costs fall. In another sign of Germany’s recent strength, the Bundesbank said on Tuesday that the country’s debt had fallen to 81.2 percent of gross domestic product in 2011, compared with 83 percent in 2010. That is still far above precrisis levels: in 2007, German debt was 65.2 percent of the size of the country’s economy.

“The problem with the crisis in Germany is that we know we have a crisis, but we don’t feel it,” said Eckart D. Stratenschulte, a political scientist and the director of the nonprofit European Academy Berlin.

Even as the European Central Bank loans improved market conditions, European leaders, including Ms. Merkel, were clear that they did not believe that the crisis was over. Many in Germany argue that a sense of crisis — and the elevated borrowing costs that come with it — is necessary to end out-of-control spending in the heavily indebted nations and to push through the economic liberalization they need to restore growth.

But the higher borrowing costs and austerity measures cut into growth, critics say, lowering government revenues in a self-defeating downward spiral and leading to higher interest rates and further budget cuts. “It’s concerning that the markets are again running out of patience and driving yields higher,” said Thomas Mayer, chief economist at Deutsche Bank in Frankfurt. “That creates further head winds.”

The I.M.F. on Tuesday raised its forecast for global growth slightly for the year. In Europe, the fund projected recovery in the second half of 2012, except for Spain, Italy, Greece and Portugal, where substantial improvement is not expected until next year.

The crisis, Mr. Mayer said, is like “a manic depressive moving between euphoria and worries, and now we’re in the valley of worries again.”

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Return of the euro crisis After the sugar rush – PFG Special Report

 

April 14, 2012

Mathieu Armand
European Regional Managing Director – Asset Management

Spanish bond yields have risen as the effect of cheap ECB cash wears off

THE high is over. The European Central Bank’s two long-term refinancing operations (LTROs) in December and February saw commercial banks borrow over €1 trillion ($1.3 trillion) of three-year money at the ECB’s main interest rate, which it had cut to 1%. Ostensibly a scheme to keep euro-area banks afloat, the LTROs also boosted flagging public-debt markets in the zone’s southern periphery, as banks used some of the cash to buy high-yielding bonds. That effect has faded.

Spain’s ten-year government-bond yield has been rising since the second tranche of three-year ECB cash was doled out. This week it reached almost 6%, the highest level since November (see chart 1). The U-turn owes a lot to the shifting dynamics of the euro-zone bond markets, which have also affected Italy. Missteps by Spain’s new government have not helped. Beneath all this lie deeper fears about Spain’s injured banks, the stringency of the government’s fiscal plans, and the impact of both on an already weak economy.

Start with the bond-market dynamics. With tacit support from regulators, the stock of government bonds held by Spanish and Italian banks rose by €122 billion between November and February. Prices

surged and yields fell. Hedge funds which had sold borrowed bonds in the hope that prices would fall were forced to buy them back. The rally lured others in.

This virtuous cycle turned vicious in early March. Some investors say the buying petered out once yields fell below 5%, when the bonds might no longer be considered cheap. But the conclusion of the second and last LTRO may have been the main trigger. Banks which bought periphery bonds have used up their ammunition. “The minute the ECB says ‘no more,’ the bank bidder is lost,” says a hedge-fund manager. Since there are few committed buyers of bonds beyond such banks, the smart money bet that yields would rise again. Brokers are less willing to take bonds off sellers’ hands in the hope that buyers eventually turn up, says Andrew Balls of PIMCO, a fund manager. In thinly traded markets, bond prices can suddenly shoot up if only a few investors take fright and start selling.

The clumsy handling of Spain’s 2012 budget may have persuaded some to sell. The newish Spanish government delayed it until after local elections in March; it also announced that its deficit target would be 5.8% of GDP, not the 4.4% agreed with European leaders (the compromise was a goal of 5.3%). The budget minister, Cristóbal Montoro, and the economy minister, Luis de Guindos, “contradict each other all the time”, complains a Spanish economist.

Yet Spain has deeper problems than muddled messages. The 2011 budget deficit was 8.5% of GDP, not the goal of 6%, in large part because of overspending by Spain’s autonomous regions. The economy is in recession—industry shrank by 5.1% in the year to February according to figures released on April 11th. Attempts to cut the deficit by 3.2% of GDP in a year will make things worse. Reforms to the jobs market, making it cheaper to fire workers and easier to set pay locally, will benefit Spain’s economy in time but not now.

Anxiety about Spain’s banks worsens the outlook further. A messy end to Spain’s long construction and mortgage boom means a lot of bank loans have already turned sour. More are likely to. Property prices have not yet fallen as far as in Ireland, the euro zone’s other housing black spot. Investors fear that the state will be called on to recapitalise Spain’s banks.

To complicate matters, much of Spain’s huge private debt is owed indirectly to foreigners via its banks. Spain’s net investment deficit—the sums owed to foreigners by firms, householders and the government, less the foreign assets they own—comes to 93% of GDP, the accumulation of a long series of current-account deficits. The increasing home bias of euro-zone investors makes it harder for countries with foreign debts to roll them over. Greece and Portugal have similar foreign debts but have higher borrowing costs (see chart 2).

Spain and Italy could not live with today’s borrowing costs for long unless the outlook for their economies were to improve dramatically. So they may have to look to outside help. But it would be hard for the ECB to sanction another LTRO so soon, reckons Laurence Boone of Bank of America. The ECB could restart direct bond purchases: Benoît Cœuré, a member of the bank’s six-strong executive board, suggested on April 11th that it might, which helped push Spain’s bond yields down a bit. But that would make existing investors worry more about subordination to the ECB in the event of a restructuring. In any case Mario Draghi, the bank’s president, has recently said high yields are the bond markets’ way of asking governments to implement promised reforms.

Spain could volunteer for the kind of support programme that Greece, Portugal and Ireland have signed up to. But Italy is scarcely in any less trouble and the euro zone’s meagre rescue fund could not stretch to a bail-out of both countries for long. A more likely outcome is that Spain is eventually forced to draw on the shared rescue fund to recapitalise its banks, which might in turn take pressure off its sovereign-borrowing costs. Meanwhile, some have turned to the next trouble spot. “France is our cheapest and biggest short,” says one hedge-fund manager.

 

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Greek socialists vote for new leader

Greek socialists vote for new leaderGreek supporters and members of the socialist Pasok party were set to ratify the election of Finance Minister Evangelos Venizelos (pictured) as new party leader on Sunday, ahead of a general election expected late April or early May.
Greece’s socialists were set on Sunday to choose Finance Minister Evangelos Venizelos as their new leader in a bid to avert a disaster in upcoming elections after two years in power marked by austerity pain.

A French-educated law professor from the northern metropolis of Thessaloniki, Venizelos stands unopposed to take over the historic Pasok party which has ruled Greece for a combined two decades since democracy was restored in 1974 after a seven-year army dictatorship.

The 55-year-old told reporters last week that the election provided a good opportunity to energise the party ahead of legislative elections which are expected to take place in upcoming months.

“It will be a useful opportunity to rally the party, to mobilise and activate its reflexes,” he said.

Venizelos is hoping to capitalise on a record deal with private investors last week to erase more than 100 billion euros ($130 billion) of near and midterm debt to give Greece time to enact additional reforms needed for future loans.

But the International Monetary Fund reminded Athens on Friday that the pressure remains very much in place.

Greece has “little if any margin” for slippage on reforms under its new bailout program, according to IMF documentation for its loan to Athens.

The International Monetary Fund, which decided a new 28 billion euro loan for Greece on Thursday said Greece could reach its debt reduction targets if it adheres to the tough austerity measures — including slashing minimum wages, trimming pensions and cutting 15,000 public jobs this year.

But if implementation moves too slowly or falls short, or if the economy does not respond to reforms as fast as expected, “a deeper recession and a much higher debt trajectory would be the likely result.”

“Political risks linked to the electoral calendar create additional uncertainty about policy implementation,” the IMF added.

Venizelos insists that his goal is to win the next legislative election, which has not been officially announced but is expected in late April or early May.

“The goal can only be victory,” the bullish minister said last week. “We have a crisis in progress ahead of us, one that we must manage.”

Around 390,000 card-carrying party members and millions of supporters have been called to participate in Sunday’s nationwide procedure which will give an early indication of Venizelos’ chances of turning around the party.

After two years in power before a coalition government was formed with the conservative New Democracy in November 2011, Pasok has been identified with an unpopular EU-IMF economic rescue plan and faces the lowest ratings in its 37-year history.

Appointed to the finance ministry in June, one of Venizelos’ first acts was to push through an austerity law worth 28 billion euros ($37 billion), including 50 billion euros in privatisation measures, in the teeth of violent street protests.

The party’s outgoing leader George Papandreou, son of Pasok founder Andreas Papandreou, was forced to step down as prime minister a few months later to avert a backbencher revolt in parliament.

A poll in Kathimerini daily on Friday, which incorporated a large absentee expectation of 25.5 percent, put Pasok back in fifth place with 11 percent, far behind the conservatives who were given a 14-point lead.

The poll gives the new Pasok leader an approval rate of only 30 percent.

Greece’s current coalition government, headed by former European Central Bank deputy chief Lucas Papademos, must still ratify in parliament a new eurozone bailout worth 130 billion euros designed to save Athens from default.

And the next government must pursue the unpopular economic overhaul on top of past tax hikes and wage and salary cuts that have plunged Greece into the worst recession in decades, with more than a million people officially out of work.

A gifted orator, Venizelos had previously campaigned to take over the party in 2007 after a previous Pasok electoral defeat but handily lost to Papandreou.

A decade ago, he was the minister in charge of Greece’s hectic preparations for the 2004 Olympic Games that eventually ran massively over budget.

Ballots opened at 0700 GMT at around 1,000 locations nationwide.

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Greek finance minister takes charge of socialist party

 

With general elections due to take place as early as 29 April, Venizelos’s selection as leader of what has traditionally been the country’s biggest leftist force is seen as key to political stability.

Newly elected president of Pasok socialist party Evangelos Venizelos

The newly elected president of the Pasok socialist party, Evangelos Venizelos, arrives at the party’s headquarters in Athens.

Barely a week after negotiating the largest sovereign debt restructuring in history, the Greek finance minister, Evangelos Venizelos, has been elevated to the helm of Pasok, the country’s embattled socialist party.

As thousands of Pasok members filed into polling stations to endorse the bullish politician – who was the sole candidate – Venizelos pronounced the start of a “new era” for a party whose popularity has plummeted as it has navigated Greece’s financial crisis.

“This is the beginning of Pasok’s quest to find its soul again,” said the 55-year-old law professor, who replaces the former prime minister George Papandreou.

With general elections due to take place as early as 29 April, Venizelos’s selection as leader of what has traditionally been the country’s biggest leftist force is seen as key to political stability. In an economic climate that has become increasingly explosive, polls have shown other leftist groups and extremists gaining ground.

The finance minister, who is expected to resign from the post on Monday, is among Athens’s most talented politicians, and his handling of the €206bn (£171bn) bond swap – the success of which surprised even the cynics – has won widespread plaudits.

“It’s astonishing that a French-trained law professor who was not a typical expert in economics did so well negotiating what is one of the biggest financial experiments in modern global history,” said Theodore Pelagidis, professor of economic analysis at the University of Piraeus.

“Because he is so mentally sharp he was able in record time to familiarise himself with exotic financial tools and procedures.”

The deal, a precondition of further aid from Brussels, the European Central Bank and the International Monetary Fund (IMF), was closed after eight months of highly complex negotiations between Greece and private sector bondholders at the Washington-based Institute of International Finance.

Athens receives a first tranche of aid on Monday, exactly one day before it must repay €14.5bn in maturing debt.

The groundbreaking agreement, which slices €107bn from Greece’s debt pile, appears to have eased fears of an imminent Greek exit from the eurozone, a scenario likened at the weekend to “opening the gates of hell” by the country’s central bank governor, Giorgos Provopoulos.

“Fortunately the decisions by the Eurogroup and successful completion of PSI [bond swap] are making this scenario distant and give Greece the chance to enter, with hard work, a virtuous circle,” he said.

Rebuilding Pasok

Pasok has an estimated 400,000 card-carrying members. Aides say if Venizelos’s candidacy is endorsed by 100,000 it will have been a success, given the collapse in support for a party identified almost exclusively with the biting austerity demanded in exchange for aid.

Elected to power with a landslide victory in October 2009, the socialists’ ratings have crashed to around 10%, levels not seen since the party, founded out of an anti-junta resistance movement by George Papandreou’s father, Andreas, was first voted to parliament in 1974.

“Venizelos has earned the respect of everyone, even his fiercest enemies, with the stamina he showed handling the PSI,” said a government official referring to the debt restructuring. “But the one-million-dollar question now is will he be able to rebuild Pasok?”

Capitalising on the agreement is unlikely to be enough. Under extraordinary pressure to deliver on their promise to modernise the economy by enacting unpopular reforms, Greek politicians must walk the tightrope of pleasing creditors while placating an increasingly angry populace.

Speaking to Sunday’s To Vima, Poul Thomsen, the IMF mission chief to Greece, said that while the debt swap provided a necessary breathing space to enforce change, “continued international support depended on stable progress.”

It was, he said, the country’s last chance. A third rescue package – already being discussed in view of the austerity-driven economic death spiral gripping Greece – was “off-limits”.

“If that happens there will be a problem,” he told a local radio station, adding that public utilities that had “outlived” their purpose had to be closed immediately.

No one is more aware of the demands now being made of Greece than Venizelos. Insiders say the finance minister had “three frank discussions” with his German counterpart, Wolfgang Schauble, in which he was told, bluntly, that Athens either enact growth-enhancing structural reforms or “be left out of the eurozone”.

As the man most associated with painful fiscal policies, his first act as finance minister last July was to push through a €28bn package of austerity cuts that included a deeply unpopular privatisation drive – measures that prompted an orgy of violent street protests.

With recession set to further erode Greece’s economic output – GDP has fallen by a cumulative 20% since 2008 – and an army of international “supervisors” about to descend on Athens permanently, resentment over policies that are also seen to impinge on the nation’s sovereignty have far from abated.

Instead, Venizelos, who becomes Pasok’s fourth president, takes over a party that is not just floundering but fighting for its life.

 

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