Greece to dissolve parliament for new election

Greece's day-old Parliament held its last session today to allow for new elections next month that are being cast as a decision on whether to keep the country in the 17-nation eurozone — even if that means accepting a deeply unpopular austerity programme.

Inconclusive elections on May 6 left squabbling politicians unable to form a government, deepening a political crisis and giving strength to radical parties that reject the terms of the country's international bailout, without which it would default and have to drop out of the currency union with catastrophic financial consequences.

Greek President Karolos Papoulias is expected to formally dissolve Parliament and call elections tomorrow.

In a symbolic move yesterday, the 300 legislators elected May 6 were sworn in for just one day, including 21 politicians from the far-right Golden Dawn party. A caretaker government will lead Greece until the new election expected on June 17, but it can't make any binding decisions.

Such political paralysis comes at a critical time for Greece, which must make more budget cutbacks next month to get new funds from its international bailout, which has kept the country afloat since May 2010.

German Chancellor Angela Merkel spoke with President Papoulias by telephone today to underscore EU hopes that a government emerges from the June 17 poll with a strong mandate.

"We're awaiting the results of these elections and it's the wish of all European partners and the (German) government that a government capable of taking decisions in Greece should be formed as quickly as possible after the elections," said Georg Steiner, Germany's deputy government spokesman.

With a government unable to make binding decisions until the elections, all eyes will be on Germany and other European leaders for signs that they will prove flexible in their demands for the new cuts next month and, more broadly, in Greece's bailout terms.

While Merkel has hinted that European economic policies could be supplemented with more growth-oriented measures, she has not signalled any willingness to significantly ease Athens' austerity plan.

European Parliament President Martin Schulz urged Greeks to stay the austerity course amid a growing belief in Europe that austerity ought to be counterbalanced with growth-boosting measures.

"We are living in a time when in Europe, finally, there is talk of growth and employment and not only of one-sided austerity. This is exactly the point in time when Greece should not give up," Schulz said during a visit to Athens on Friday.

"I will try to do my part and tell the Greeks ' hang on, you went through (such a) difficult period, don't let all the sacrifice be for nothing."

The big winner from the May 6 election was the second-placed Radical Left Coalition, or Syriza, which capitalized on public discontent by promising to either toss out entirely or revise Greece's austerity commitments. It insists nevertheless that it wants to keep the country in the euro.

Opinion polls suggest the June 17 election will be a closely contested affair between Syriza and the two mainstream, pro-austerity parties that alternated in power for the past four decades and which have lost more than half their support.

JP Morgan Chase Bank analyst David Mackie raised the likelihood of a Greek euro exit from 20 per cent to 50 per cent if Syriza wins the elections and rejects the eurozone-imposed austerity measures outright. That could prompt Greece's creditors to withhold any further bailout funds and push the country into reverting back to its old currency, the drachma.

Mackie said a Greek eurozone exit would see the country's gross domestic product shrink by as much as 25-30 per cent.

"If the direct effects of default were the only thing to worry about, a Greek exit would be manageable as far as the rest of the region is concerned," said Mackie.

The biggest risk is that Greece's exit from the euro could destabilise other financially weak countries in Europe, causing their borrowing rates to rise as investors worry they may also eventually leave the currency union.

Even if Syriza does win there is a slight chance that Greece could stay in the eurozone, as long as it's willing to compromise, Mackie said.

"The key issue is whether there are terms of continued EMU membership that are acceptable to both sides. There will be an attempt to reach a compromise, which is possible if both sides are willing to concede some ground."

The heightened uncertainty about which way Greek voters will go prompted Fitch ratings agency yesterday to downgrade Greece to the lowest possible grade for a country that is not in default, warning of a "probable" Greek exit from the euro currency union if next month's poll results in an anti-bailout government.

In the streets of Athens, people expressed a mixture of apprehension over the future of the country and anger with politicians who let it come so far.

"For me, the political system needs to sit down and come to an understanding because they are killing our country, that is for sure," said Athens resident Georgia, who didn't give her last name. "If they don't do it, our country will be lost."

AP