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Greek Streets 'Explosive' as PM Faces Confidence Vote

European stocks rose early Tuesday and the euro stabilized versus the Swiss franc on hopes that euro zone officials will find a way to prevent a Greek default.

The former Greek Prime Minister, George Papandreou
Pierre Verdy | AFP | Getty Images
The former Greek Prime Minister, George Papandreou

Pressures to avoid bankruptcy intensified as rating agency Fitch said it would consider a voluntary rollover of Greek bond maturities – something European officials have been hoping to achieve – as a default and would cut the country's rating.

The new Greek government faces a vote of confidence on Tuesday night, with the outcome critical to the survival of the government, and to the disbursal of loans from the 'Troika' of the European Union (EU), International Monetary Fund (IMF) and European Central Bank (ECB).

Voting is expected to take place at midnight, and most analysts are predicting that Papandreou will survive the vote. By bringing more PASOK party insiders into his cabinet – at the expense of technocrats – the Prime Minister should be able to head off opposition from within his own party.

To pass, Papandreou needs an absolute majority in parliament, and an attendance rate of more than two-fifths, equivalent to 120 members.

Eurasia Group's European director Wolfgango Piccoli wrote in a note that in the "low probability scenario" of a no-vote would lead to early elections, which would mean that the vote on austerity would be delayed, and so would the next tranche of the EU/IMF package. This would heighten the risk of default, unless some form of bridging financial agreement could be arranged to fill the financing gap.

Persistent protests in Athens' Syntagma Square show that the Greek people feel increasingly disenfranchised with their political system and analysts told CNBC that the growing separation between the government and the population over austerity could prove 'explosive'.

Prime Minister George Papandreou last week floated the possibility of stepping down in order to build a government of national unity, and on Thursday reshuffled his cabinet, removing his finance minister George Papaconstantinou and replacing him with his former rival for the leadership of the PASOK party, Evangelos Venizelos.

EU finance ministers met on the weekend, and announced early Monday morning that they would withhold a 12 billion euro loan until the Greek parliament passes the austerity bill. Tuesday's vote is just the first step towards achieving some kind of a political consensus on the package of cuts and privatizations that is supposed to save Greece from defaulting on its debt.

However, such 'national unity' would be restricted to the political sphere, analysts have said. It might improve the chances of actually implementing cuts, but it would still stand in stark opposition to the wishes of the protesters in Syntagma Square.

The power of the street to force divisions in the government has already been demonstrated. Papandreou's party now has 155 seats out of 300, after a number of defections thinned out his ranks.

"The fact that Papandreou came up with this idea that he might resign if there is a national unity government last week, that, I think, is a direct result of the fact that you have had for the last four weeks a permanent assembly of protestors outside parliament, trying to oppose austerity measures," Pepe Egger, who heads the Western Europe division at Exclusive Analysis, told CNBC.com.

Slim Majority

Papandreou only has a slim majority, and support for the austerity measures imposed upon him by the troika is crumbling from within his own party. This drove the Prime Minister to reshuffle the cabinet.

The unions have threatened a 48-hour strike, rather than just a 24-hour strike, adding even greater pressure to a government struggling to find ways to restart growth.

"The fact that it's everybody, it's not just the usual hooded anarchists, it's old, young, retired, pensioners, everybody, saying 'we no longer support you' is already having an effect. It's forcing him to try to enlarge his majority and get the opposition on board, or try to somehow shore up his own party," Egger said.

"The fact we've got that far is a result of the protests on the street," he added.

There are no mainstream parties who have taken an ideological stance and are opposing austerity, which means that past the gates of the former royal palace that now serves as the Hellenic Parliament, the protestors have no clear voice.

"There is a lot of opposition outside parliament, but inside parliament only the fringe left is opposing it," Egger noted. "Essentially what the people outside of parliament signify is that there is no mandate for (Papandreou) to do what he is doing."

Papandreou's left-leaning PASOK won the 2009 elections partly on its promise to spend its way out of the crisis, but six months down the line had to change tack to avoid bankruptcy.

Cutting Spending

The then-incumbent New Democracy party was ideologically more behind cutting government spending, meaning that they would have little interest in taking a radically different position now – and little credibility should they do so, analysts said.

"The heart of the conflict is that if you ask the Greek people would you like to halve your pension and cut your salary and dismantle the welfare state because some banks and politicians have mismanaged your state finances? The majority would say no. But clearly there aren't that many alternatives to that," Egger said.

Greeks are stuck with a situation where they have few, if any, political outlets to voice their dissent.

"I think it's pretty evident now that there is a clear disconnect between the politicians and the people. That's very much a cliché, but sometimes clichés become clichés by being true," David Lea, Western Europe analyst at Control Risks told CNBC.com. "I think that's definitely become the case now."

Should the vote of confidence fail and the government collapse, any elections would reflect the lack of a clear opponent to austerity, Lea said.

"If we do go to elections we're going to get a multi-colored, fragmented, unstable, disparate coalition. That's why these protests are so significant, because (anti-austerity) is one thing that people can get behind," he added.

"Last week, if anything drives a default, I thought it would be the disputes between the ECB, the euro zone governments and the IMF," Lea said.

"Now I'm more towards thinking that it is going to be a public rejection of the course that Papandreou's been taking for the past two years, and the only way that is going to manifest itself is large numbers of people in Syntagma Square," he added.

Protests to Go On

Because of the separation between the public sentiment and the government's agenda, protests and strikes will continue to dog reforms and austerity measures, according to Lea.

"If they can get past the confidence vote, it doesn't mean they can pass the austerity plan, and if they pass the austerity plan it doesn't mean they can implement it," he said.

The potential for the protests to turn violent quickly is high, analysts have said.

As Egger noted, there is "ample precedent" for protests to turn into riots. In 2008, demonstrations over the shooting of Alexandros Grigoropoulos, a 15-year old boy, by police in Athens, turned into a week-long riot, with public buildings, including a police station, set on fire by protestors wielding Molotov cocktails.

The riots escalated so quickly and were so widespread that the Athens police reportedly ran out of tear gas. With tensions as high as they are now, Egger said, overzealous policing could see the situation spiral out of control.

"Until the vote of confidence and after that, until the vote on austerity, there is a very explosive situation there," he said. "The Greek police are not known to operate with a soft touch. This is a very risky situation. If they injure or kill somebody with whom they are fighting these running battles, then the whole thing is going to go up in flames, like it did in 2008."

"In that case, the government could become unable to function," Egger warned.

- Antonia Oprita, CNBC.com, contributed to this story

Contact Europe: Economy

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