Greece Readies a Head-fake on Europe.

You may think that the Greek struggle is trivial on the world stage, but as those of you who have been following this blog know, I believe that it is the linchpin that will decide the fate of Europe and the trajectory of the American economic recovery over the next few months. I believe that Greece will claim to accept  the austerity measures, take the $40B in the tranche and then withdraw from the Euro, default on it’s debt and devalue the Drachma. The country would then be solvent and have enough tax revenue to cover its operating expense without implementing any austerity measures at all. A win for the Government and a win for the people.

Talks between Prime Minister Lucas Papademos and the three political leaders in his government stalled early Thursday, but the leaders pledged to resume talks in order to reach an agreement on austerity measures demanded by Greece’s financial backers in return for a $170 billion bailout.

Greek and European Union flags fluttered near the Parthenon in Athens on Wednesday.

If the leaders do not accept the measures, Greece’s foreign lenders will not give it the aid it needs to prevent a default as soon as March. It would also jeopardize a bond swap under which private investors would take losses of up to 70 percent. But as dawn neared on Thursday, the line between Greek political theater and international financial trauma was difficult to discern.

In a sign that an agreement was still expected, Mr. Papademos’s office said in a statement early Thursday that the three parties had agreed on all issues except one and that they would continue the discussion “immediately,” so that it could be completed ahead of the meeting of euro zone finance ministers scheduled for Thursday evening in Brussels.

But in a dramatic late-night twist, while Mr. Papademos held talks with Greece’s foreign lenders, one of the three leaders participating in the government, George Karatzaferis, the leader of the Popular Orthodox Rally, or L.A.O.S., issued a statement after 1 a.m. saying that he was unwilling to agree with the terms of the new bailout and indicating that he might withdraw from the government.

That would leave the burden for accepting the austerity measures — including sweeping wage and pension cuts — on the other two parties in the coalition, the Socialists and center-right New Democracy party.

Although Greece’s so-called troika of foreign lenders — the European Commission, European Central Bank and International Monetary Fund — have indicated that they will ask for written agreements from the party leaders that they will support the loan agreement, the government is still expected to be able to approve the agreement without Mr. Karatzaferis’s party.

Even if he does pull out of the coalition, the government will still have a majority in Parliament, where L.A.O.S. has only 16 of the coalition’s 252 seats.

With elections expected as soon as April, the parties are fighting for their political survival.

One of the most controversial austerity measures is a 22 percent reduction in the minimum wage, to around $775 a month. The cut is expected to affect all salaried workers, because the base wage is used as a benchmark by employers.

The leaders appear to have agreed to that, according to the statement by the prime minister’s office.

But the leader of New Democracy, Antonis Samaras, said they had foundered over cuts to pensions. Mr. Karatzaferis, whose populist, hard-right former opposition party has been losing ground with voters since it joined the government, said he would support Mr. Samaras to prevent proposed cuts to supplementary pensions. Mr. Papademos met with troika officials late into the night to try to fill a $300 million budget shortfall that would be left if the pensions were not cut.

Analysts suggested that the coalition partners were seeking to avoid blame for the agreement in hopes of leaving Mr. Papademos as the principal target of public anger.

Jean-Claude Juncker, the prime minster of Luxembourg, who heads a group of euro zone finance ministers, had scheduled a ministerial meeting for Thursday that he had previously said he would call only if Athens were ready to sign off on the plan.

Even that meeting would not be the final word. But it would allow for preparations for a bond swap under which private investors would take losses of up to 70 percent, according to one person briefed on discussions who agreed only to describe them anonymously.

Some details of the bailout remained unclear, but it appeared increasingly likely that the European Central Bank would agree to forgo at least some of its potential profits on Greek bonds once the government in Athens had agreed to the austerity measures.

The first installment of the bailout was supposed to be a $118 billion tranche in March, but officials are now saying that it might be limited to about $40 billion to ensure that Greece continues to abide by the terms in coming months.

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About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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