Greece Forms New Government

Cabinet to be announced by three-way coalition; BOE stimulus push fails

A New Democracy supporter waved a Greek flag during a rally in Athens before the election. (Photo: AP) A New Democracy supporter waved a Greek flag during a rally in Athens before the election. (Photo: AP)

On Wednesday Greece managed to agree in principle to form a conservative coalition government, with three pro-bailout parties agreeing to cooperate and giving the coalition a majority of 179 seats in Parliament.

Reuters reported that Evangelos Venizelos, head of the Socialist PASOK party, made the announcement and said that cabinet members would be chosen by evening. The coalition formed by PASOK, New Democracy—headed by Antonis Samaras, and which won the election by a narrow majority—and the Democratic Left party gives New Democracy a governing coalition, although policy platforms and cabinet memberships are still under discussion.

Venizelos also said that the key issue was the formation of a team to renegotiate Greece’s bailout of 130 billion euros ($165 billion). He was quoted saying, "Greece has a government and this is the message that the outgoing finance minister [George] Zanias will take to the Eurogroup."

Bloomberg reported that Samaras would be sworn in as prime minister by President Karolos Papoulias. An unnamed official said that the swearing in would take place after Samaras visits Papoulias later in the day to brief him on the results of his mandate to form a government.

A BBC report quoted Democratic Left leader Fotis Kouvelis saying, "We decided to give a vote of confidence to the government that will be formed." He said in an AP report, "We are offering a vote of confidence, not a vote of tolerance. We will be part of the government. That means that even if we disagree on a specific draft law, we will not withdraw our support or bring down the government."

Should the coalition fail for some reason to form a government by Thursday, second-place finisher Syriza, headed by Alexis Tsipras and firmly opposed to the bailout, will be handed the mandate instead.

The close shave Greece—and the rest of the eurozone—experienced in the narrow loss of Syriza to New Democracy has certainly shaken some willingness to compromise into eurozone officials—or at least the appearance of it. However, not all officials are equally willing to allow Athens a bit of breathing room in its present economic dilemma.

In a Reuters report, Bundesbank President Jens Weidmann kept the pressure on in an interview with a German magazine, saying that the election outcome did not change the need for Greece to stick to its bailout conditions in order to continue to receive financial assistance.

He was quoted Wednesday saying, "There is an agreement with Greece, and that counts," adding, "If there are discrepancies [from the program], we have to analyze the causes, but first of all it will be up to Greece to demonstrate that there is a way to repair it."

Elsewhere, Bank of England (BOE) Governor Mervyn King was outvoted for the first time since 2009 in a push to boost stimulus, though the shift in momentum signals a trend that could result in expansion at the next meeting of the central bank’s Monetary Policy Committee (MPC).

Bloomberg reported that King joined Adam Posen, David Miles and Paul Fisher in voting for a higher bond purchase target, but the vote was 5–4 in favor of keeping current stimulus at its present level of 325 billion pounds ($511 billion). King, Posen and Miles had voted for an expansion of an additional 50 billion pounds expansion, and Fisher advocated a lesser boost of 25 billion pounds.

A separate report on Wednesday indicated that, according to the Office for National Statistics, unemployment claims rose in Britain by 8,100 in May to reach 1.6 million.

In the minutes of their June 6-7 meeting, BOE policy makers said, “The risks to U.K. and global activity from financial distress and political tension within the euro area had intensified again,” adding that most members “judged that some further economic stimulus was either warranted immediately or would probably become warranted to meet” the 2% inflation target.

RBS economists including London-based Ross Walker and Richard Barwell were quoted in the report saying that it was likely an additional 50 billion pounds would be added to the stimulus next month, “with further increases beyond that a clear possibility.”

Vicky Redwood, an economist at Capital Economics Ltd. in London and a former central bank official, said in the report, “The chances of more QE next month are looking quite high now. Given that King’s in the minority, it increases the chance that some of the other five will follow as he’s the intellectual leader.”

In its minutes, BOE said that most members of the MPC saw “merit in waiting” to take any steps to expand QE pending the results of the Greek elections on June 17 and the outcome of the meeting of the European Council at the end of the month. It also said, “The case for further stimulus depended in part on how those events unfolded.”

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