Snatching defeat from the jaws of victory, Greek style

By J Brooks Spector 2 November 2011

Following an all-night meeting in late October, European leaders signed a deal to bolster the banks, increase the debt stabilisation fund and give a buzz cut to Greek debt liabilities, all in an effort to calm the roiling waters of the eurozone. For a few days, the markets rallied on the notion that the deal was a good one – even if holes in the plan were becoming increasingly clear in succeeding days. And then, the Greek Prime Minister changed it all.  By J BROOKS SPECTOR.

The cover of the newest Economist says it all; a lifeboat bearing Europe’s leaders, being lowered from a sinking ship turns out to be a kitchen sieve. No caption needed.

In an apparent effort to shift the onus of the impact plan away from his government, Greek Prime Minister George Papandreou said he would insist on a national referendum to vote on the agreement – or at least the part of it that affects Greece. The vote would probably take place in January, at about the point when Greek bondholders are supposed to sign up for the 50% haircut being negotiated with the International Institute of Finance. After hearing about the referendum call, one Athens banker told the media: “This is a worrying decision by the prime minister. It could derail the whole process even before it’s properly started.”

Papandreou, in announcing the call for the referendum, had said: “We have faith in our citizens, we believe in their judgment and therefore in their decision. All the country’s political forces should support the [bail-out] agreement. The citizens will do the same once they are fully informed.” Share the blame; share the pain. Of course if the Greek population votes it down, scuttling the bailout, the other elements in the plan aren’t going to have much weight behind them if the bailout doesn’t come on stream. And Papandreou’s political future will be a bit problematic as well.

Analysts say Papandreou’s surprise move is reinforcing concern the Greek political dynamic is spiraling out of control. Growing popular anger over the public sector job cuts and tax increases have fueled a rolling run of strikes and violent demonstrations in Athens, as well as other Greek cities. And of course the prime minister’s call for a referendum will not be calmly received in Brussels, Paris or Berlin, especially following Papandreou’s earlier assurances at Wednesday’s summit that Greece was determined to maintain a steady pace of reform.

One senior EU official told the Financial Times that Papandreou had already seemed reluctant about parts of the bailout package during the summit of EU presidents and prime ministers – but no one expected a referendum announcement that came “like a bolt out of the blue”. This official added, “I don’t think anyone expected this. The calculation has to be this is the only way [Papandreou] believes he can get this through.”

Papandreou’s government is facing tough times with calls for resignation from his opposition. Sony Kapoor, head of Re-Define, an economic consultancy, adds “With an irresponsible opposition that is promising Greek voters the moon, it is very difficult to see how this referendum could be won. The decision is good for democracy but is likely to make the euro crisis worse by heightening uncertainty in this very fragile environment.” And a new opinion poll showed nearly two thirds of Greeks opposed the bailout agreement, which would include yet another 100,000 job losses over the next three years and still more pension cuts.

Greek Prime Minister George Papandreous. Reuters.

Of course, this sudden referendum call may be a canny political move to ward off the consequences of a no confidence vote and an early election. And it may also be Papandreou’s way of deflecting on to others the dire consequences of the austerity measures that the Greek government has had to impose in response to its need for external funding from the EU and others to cover its due bills. The premier also announced that a vote of confidence in his government would be held very shortly to endorse the referendum proposal. That vote would follow a three-day debate on Greece’s worsening economic and social problems. There are lots of chances here still to snatch those defeats from the jaws of victory.

This was, not surprisingly, some really bad news for stock exchanges almost everywhere, as investors moved their hot money to the relative safety of the US dollar and US treasury bonds. Bank shares like Citigroup, Morgan Stanley and JPMorgan Chase were especially vulnerable on worries over their exposure to European sovereign debt. Of course French banks, with their big holdings of Greek government bonds, would be especially vulnerable to big losses if Greece enters a disorderly default on its debt – as opposed to the planned, gentle, orderly one the agreement had brokered. In response to fears like that, French banks Societe Generale SA fell 16% in Tuesday trading and BNP Paribas SA dropped 11%. Now, aren’t you glad you bought those public utility bonds instead? You didn’t either? Oh well.

This newest wrinkle of the referendum has now put the revival of the world economy right back into play – again. Echoing many analysts’ views, Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, told the media, “The Greek referendum puts the connections between European countries at risk, from free-trade agreements to the common currency.”

Others in Greece add that this referendum is an invitation for instability. “When the debate is very passionate and things are tense, holding a referendum could be risky,” says Alexis Papahelas, the editor of the Greek center-right daily Kathimerini. “If the referendum fails, we have a very big chance that the country would go into a disorderly default.” Meanwhile, the centre-right New Democratic Party’s Yiannis Michelakis said Papandreou “has tossed Greece’s future in Europe in the air like a coin.”

As yet more fallout from the turmoil of the ongoing eurozone crisis, on Monday, the big US securities firm MF Global Holdings, run by former New Jersey senator and governor Jon Corzine, became Wall Street’s first big casualty of the European debt crisis. MF Global filed for bankruptcy after worries about its holdings of European government bonds led its business partners to flee, and then the ratings agencies downgraded its rating – the game was up for Corzine’s firm. Lest we forget, Corzine used to run Goldman Sachs and he was supposed to be one of those masters of the universe – with a perfect sense of pitch about investments.

The sound you hear now may be that financial-rescue-plan-in-a-can once again being kicked down the dark street towards the IMF, rather than a eurozone victory march. DM

Read more:

  • Greece shocks markets with referendum on austerity, on the AP website;
  • Greece calls referendum on EU bail-out, in the Financial Times; and
  • Anxieties stir as Greece plans referendum on latest Europe aid deal, in the New York Times.

Main photo: A depiction of German Prime Minister Angela Merkel in a Nazi uniform. Reuters.


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