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Greek government in desperate battle to avert default

The Greek debt crisis reached a new climax this weekend when Prime Minister George Papandreou, already en route to the US where he was due to meet IMF chief Christine Lagarde and other top officials, canceled his visit to return to Athens and chair an emergency cabinet meeting on Sunday. The surprise move is seen by observers as an attempt to prevent the ever-growing risk of a sovereign default and to keep a grip on an increasingly nervous Greek parliament.

Mr. Papandreou’s decision followed the news that the so-called “troika” – European Commission, European Central Bank, and International Monetary Fund – would not send its experts back to Greece on Monday, as planned. The verdict of these experts on whether Greece is on schedule with its plans to reduce debts, cut spending, and reform the bureaucracy is crucial for more financial aid to be released. The next loan tranche of 8 billion euros ($11 billion) out of the first Greek bailout package will only be paid if the troika is satisfied, but without it, Greece will run out of money by October.

“This is a crucial moment for Greece,” says Panagiotis Korliras, a professor at the Athens University of Economics and Business. “The prime minister’s presence is required to guarantee that his cabinet implements the measures drafted to solve this crisis. But he’s also the leader of the Socialist party, and as such, he has to make sure he still has the support of his party friends.”

According to agency reports, troika officials left Greece two weeks ago in frustration, having found a gap of 1.7 billion euros ($2.3 billion) in the Greek budget. The government reacted by imposing a new tax on real estate, but the inspectors remain doubtful and have made it clear that they would prefer structural reforms rather than new levies. Instead of traveling back to Athens, they will now hold a telephone conference with Greek Finance Minister Evangelos Venizelos today.

The emergency cabinet meeting on Sunday did not yield any palpable results, but speaking to the press afterward, Mr. Venizelos suggested that further austerity measures might be announced after Monday’s phone conversation with the troika officials. “Our main target will be to reduce spending, to rein in the state,” he told reporters.

This means more layoffs in the public sector, Professor Korliras says. “It remains to be seen if Greece’s political system is going to accept this kind of pressure from the troika.”

The political opposition is trying to capitalize on the situation. Conservative leader Antonis Samaras called for snap elections and, referring to yet more austerity measures, said: “This isn’t milking the cow any longer, this means slaughtering it.”

A meeting of EU finance ministers last Friday and Saturday in Poland postponed a decision on the next loan tranche for Greece until October. According to Greek media, Venizelos experienced a “very negative climate” at the talks. His German counterpart, Wolfgang Schäuble, warned Greece in a newspaper interview on Sunday to take the threat of a payment stop seriously. No one should be under any illusion that the next credit tranche would be paid if Greece didn’t meet the troika’s requirements, he said.

For the first time, Mr. Schäuble also hinted at the possibility of Greece leaving the eurozone. “Being a member of a monetary union is not just a chance, but also a heavy burden,” he said. “The Greeks have to decide if they are willing to bear this burden.”

“These comments from the German finance minister might suggest that the endgame is nigh,” says Gary Jenkins, head of fixed income at investment bank Evolution Securities in London. “It’s not going to happen tomorrow, as the risk of contagion is still high, but the political will amongst EU governments to keep Greece in the eurozone is clearly eroding.”

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