EU-prescribed coalition gives Greece short-term relief

The European Union stepped in to force Greece’s political parties into a coalition that will save the country from immediate default but the bickering that marked the negotiations bodes ill for Greece’s place in the euro zone.

The deal on the new coalition, to be fleshed out on Monday, still lacks an agreed prime minister and a clear mandate but will allow Greece to collect an international loan installment it needs before it runs out of cash in December.

While some analysts breathed a sigh of relief, most doubted a coalition of factious parties would will be able to push through the deep reforms, unpopular salary cuts and tax measures Greece needs to stay on an EU/IMF lifeline for long.

“These are ‘baby steps’ that are good on the surface, but cannot lead to a solution that avoids a default,» said Bob Andres, chief investment officer at Merion Wealth Partners LLC. «I don’t think it will have a material impact on the final solution.”

Greek Prime Minister George Papandreou will discuss on Monday with main conservative New Democracy opposition leader Antonis Samaras who they will appoint as premier, with non-political personalities, such as former European Central Bank vice-president Lucas Papademos as one of the potential candidates.

Their aides will hammer out how it will function before calling snap election. The two sided tentatively agreed to hold them on February 19.

“If all goes well, we will have a new government, with a vote of confidence, within the week,» government spokesman Ilias Mossialos said.

Its immediate tasks would be to secure the next, 8 billion euro tranche within weeks, follow up on steps agreed with the IMF/EU/ECB «troika» in the second bailout plan, such as submit and approve the 2012 budget before the end of November.

The way Greek politicians reached this tentative deal is ominous for the months to come.

On October 31, Papandreou called for a referendum on a second 130 billion euro bailout Athens needs to avoid default, sending shockwaves across the globe, unsettling markets, angering EU partners and average Greeks alike.

“He tripped on his sword,» said an aide on condition of anonymity. «He truly believed Greeks would vote yes and that the opposition would be forced to back the bailout plan.”

His number two, Finance Minister Evangelos Venizelos, a party rival appointed in a June reshuffle, had not been informed and was shocked. He initially backed the plan but came out against it after a meeting with angry EU leaders in Cannes.

German Chancellor Angela Merkel and French President Nicolas Sarkozy warned Papandreou he was risking not only default but an exit from the euro. Pushed by a public angry with two years of austerity and perceived lack of social justice, PASOK deputies rebelled.

New Democracy, long opposed to the bailout plan it said stifled growth, demanded Papandreou’s resignation and a short-lived, non-political government to organize elections in weeks.

Under mounting pressure, Papandreou agreed with his ministers to step down and form a coalition in exchange for support in a confidence vote, allowing him a graceful exit.

But ideological differences, chronic mistrust and bargaining over posts in the new «national unity» government, prevented progress, officials said.

“There were problems from the first moment. New Democracy rejected the two negotiators the socialists wanted to send to make the deal,» said a government official who requested anonymity.

With the potential coalition with New Democracy at risk and snap elections approaching fast, Venizelos, a party heavyweight who controls many deputies, reached out to smaller parties, in a move threatening to exclude New Democracy from the game.

This effectively brought Samaras back to negotiating table, under pressure from some of his own deputies threatening defection if New Democracy was left in the cold. But he still insisted Papandreou keeps his pledge to resign before a deal could be even be discussed.

“They are all behaving like they don’t realize enormity of the danger,» wrote commentator Antonis Karakousis in To Vima on Sunday. «Most are looking foolishly toward a future that does not exist for any of them.”

EU Economic and Monetary Affairs Commissioner Olli Rehn on Sunday warned Greece it had 24 hours to form a government that would honor its pledges or face the prospect of a euro exit.

“We need a convincing report on this by Finance Minister (Evangelos) Venizelos tomorrow in the Eurogroup,» Rehn told Reuters in a telephone interview. The 17 euro zone finance ministers meet in Brussels on Monday evening.

On this, he echoed Greek public opinion. Just hours later political leaders presented the first sketch of an agreement.

An ALCO poll on Saturday showed 52 percent of those asked favored a coalition compared to 36 percent who wanted snap polls. About 80 percent said the referendum was a wrong move.

Venizelos was seen as most capable of leading PASOK by 34 percent of party voters compared to 10 percent for Papandreou, once most popular but now ranking third behind is Health Minister Andreas Loverdos who drew 12 percent.

Venizelos is likely to stay as finance minister and even as one of two deputy prime ministers, the second to be proposed by New Democracy. If the agreed premier is a technocrat like Papademos, the two would effectively rule in an uneasy and short-lived marriage of opposites.

“I’m afraid the new government will very soon turn out to be problematic,» said Stefanos Manos, a former finance minister with New Democracy told Reuters.

“The new prime minister will be under guardianship and will not give the impression that he is in charge. Everyone will be looking to the two party leaders who will be running things behind the scenes,» he added. «The civil service wont implement any decision and everyone will be waiting for the election.”

Down the road things are even murkier. With polls showing no party winning an outright majority, an election would most likely plunge Greece into more Byzantine negotiations, further risking its financial survival and euro membership.

One thing analysts are unanimous on is that Papandreou is out of the political picture, even if he stays on as party leader. He grappled for two years with a crisis that was not of his making but proved beyond his government’s capacity.

The son and grandson of famous Greek prime ministers, Papandreou’s last speech in parliament was a swan song, recalling the ups and downs of his career and answering critics who accuse him of inheriting the socialist party.

“From my grandfather Georgios Papandreou I inherited only a watch and from my father Andreas Papandreou only his name, nothing else,» he said. «I have fought an unprecedented battle to save the country.» [Reuters]