Greek referendum gamble panics leaders, markets

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A surprise announcement by Greek Prime Minister George Papandreou that his government agreed to hold a referendum on the hard-fought deal to save his country from bankruptcy sent a wave of panic across Europe and the world.

The Greek cabinet early today (2 November) unanimously backed a plan, first announced by Papandreou on Monday, to hold a referendum over the rescue plan recently agreed by eurozone leaders (see background).

At the seven-hour emergency cabinet meeting Papandreou said that a referendum would offer "a clear mandate" for austerity measures demanded by other eurozone members.

His intention to hold a referendum took by surprise his closest collaborators. Even Finance Minister Evangelos Venizelos was reportedly unaware of any referendum plans. The eurozone plan to save Greece from bankruptcy requires no popular vote.

The announcement shook world markets, which saw their indexes plunge over the news from Athens.

Opinion polls suggest that Greeks are likely to reject the European aid package, no matter how the question would be formulated.

As EURACTIV Greece recently reported, mass protests in Athens and other cities clearly indicate that Greeks oppose plans to put back the country on track, based on austerity measures.

A rejection of the aid plan would amount to Greece's disorderly default and probable exit from the eurozone.

But more importantly, it would trigger a tsunami effect into the eurozone, hitting larger heavily indebted countries such as Italy and Spain, with some analysts saying it could spell the end of the euro.

Suicide course?

Papandreou’s motivation to call the referendum remains unclear. His most immediate concern appears to be a parliamentary confidence vote Friday. Papandreou leads a slim majority of 152 seats in the 300-seat Greek parliament. He needs 151 votes to survive politically and to enact the referendum. At least six senior MPs of his ruling PASOK (centre-left) party, angered by the referendum call, said he should make room for a more legitimate government.

Several PASOK deputies joined the opposition in calling for a government of national unity, followed by a snap election.

Observers noticed a grim Papandreou at recent EU summits. Aides quoted by Reuters said he has been shocked by the deep corruption and special interests that dominate Greek society and has felt isolated from many in his party, still dominated by the populist ideas of his late father Andreas Papandreou.

European response

In a rare televised address at the doorstep of the Elysée Palace on Tuesday, French President Sarkozy put on a long face expressing surprise and dismay by the Greek leader’s decision.

"France insists on reminding that the plan adopted last Thursday unanimously by the 17 eurozone countries is the only possible way to solve the problem of the Greek debt," Sarkozy said.

"To give the floor to the people is always legitimate, but the solidarity of the eurozone countries could not be exercised without each one consenting to the effort," he said.

Sarkozy, who holds the rotating presidency of G20, announced that he and German Chancellor Angela Merkel would meet with Papandreou today in Cannes to discuss how Greece would stick to its commitments.

The meeting would take place in the margins of the two-day G-20 summit on 3 and 4 November. All the European institutions and IMF chief Christine Lagarde would attend the meeting with Papandreou, Sarkozy said.

Sarkozy, Merkel, Lagarde, eurogroup President Jean-Claude Juncker, European Council President Herman Van Rompuy, European Commission President José Manuel Barroso, and an ECB representative will first meet at 5:30 pm, Reuters announced. They will then meet Papandreou and his finance minister at 8:30 pm.

According to Bloomberg, new ECB President Mario Draghi will be present at the meeting. Draghi started his new job yesterday and his Cannes appearance will be his first international one in his new capacity.

European Council President Herman Van Rompuy and European Commission President José Manuel Barroso issued a written statement, in which they reminded that at the summit of 27 October, eurozone leaders had agreed on a comprehensive package that included strengthening the capital of European banks, significant optimisation of the resources of the EFSF and reinforcement of Eurozone governance as well as coordination and monitoring in economic and budgetary matters.

"We are working on the implementation of those decisions, which are more necessary than ever, without delay.

"We take note of the intention of the Greek authorities to hold a referendum. We are convinced that this agreement is the best for Greece.  We fully trust that Greece will honour the commitments undertaken in relation to the euro area and the international community," Barroso and Van Rompuy stated.

 

The decision of Papandreou to call a referendum has "endangered" the euro currency, Energy Commissioner Günther Oettinger told the German daily Die Welt.

"The situation is difficult enough and now we are losing at least three months to save the euro," Oettinger was quoted as saying.

"Of course a referendum is above all a Greek political matter. But it contains large risks for Europe," he added.

Asked his view on why Papandreou took such a step, Oettinger said: "Subjectively, I can partly understand what he is doing. Objectively, he is putting the euro in even greater danger."

Rainer Brüderle, parliamentary chief of the FDP, a partner in Germany's ruling coalition, says he is "somewhat irritated" by the planned Greek referendum on the EU aid package. "This is a strange approach," Brüderle said in an interview on German radio. Precautionary measures would now have to be taken for the possible state bankruptcy of Greece, "in order to counter the contagion risk that might arise for the European banking system," he said.

Christian Estrosi, former French industry minister and close ally of Sarkozy within his UMP ruling party, called the move by Papandreou move "totally irresponsible".

"When we are in a crisis situation and others want to help you it is insulting to try to save one's skin rather than to face one's responsibilities," said Estrosi.

The referendum call is a "bad decision" with ramifications far beyond Greece, said Alfredo Perez Rubalcaba, the Spanish Socialists' candidate for the general election to be held on 20 November, quoted by Bloomberg.

British Chancellor of the Exchequer George Osborne  warned Greece that backing a bailout agreed at the eurozone summit was "crucial", the UK Press Association announced. He warned that the global recovery depended on the agreement going through.

Downing Street confirmed the UK would be involved in discussions in the "margins" of the G20, which starts on Thursday, about the eurozone package agreed last week.

 

China said on Wednesday it hopes Europe will stick to a bailout plan reached at last week's debt crisis summit.

Chinese foreign ministry spokesman Hong Lei said China had "taken note" of the Greek referendum announcement, adding that "we hope the European side can honestly implement the relevant plan to solve the crisis," AFP reported.

The official Xinhua news agency went a step further, calling on EU leaders to persuade Greece to "drop the referendum idea" or help them find a "better solution to their political embarrassment".

It also said "urgent efforts must be taken to prevent the rescue plan from being aborted".

Japanese Finance Minister Jun Azumi said in Tokyo that "everyone is perplexed" by Greece’s referendum decision and that the issue will be discussed at the Cannes summit, the Greek daily Kathimerini reports.

David Thesmar, professor of finance at business school HEC in Paris said the referendum decision made the scenario of a Greek exit from the euro zone more credible.

"I just hope that European politicians are preparing for such an eventuality," he said. "I fear that because of blindness and because of ideology they are refusing to conceive of it ... And that would really be a catastrophe, to not be ready for it," Thesmar said, quoted by Reuters.

 

The head of the Athens Chamber of Commerce Konstantinos Michaelos told Reuters Insider television that "I think by late evening this saga will have come to an end because [Papandreou] will have lost the slim majority that he has in parliament".

"This referendum will not happen. I'm hoping and praying for a government that will join other political forces," he added.

German MEP and leader of the Socialist Group in the European Parliament Martin Schulz was more sympathetic saying Papandreou "wants to ask for the approval of the people. I can understand him".

Today's edition of the popular tabloid Bild was critical, calling the current situation an "unending euro-nightmare and which once again is the fault of the Greeks".

Predicting a negative response, the newspaper called for a referendum in Germany with the question "Do you want to inject German money towards Athens?"

At a dramatic summit the night of 26-27 October, EU leaders achieved a breakthrough, giving a lifeline to Greece and avoiding contagion of the eurozone.

First, eurozone leaders agreed a new €100-billion package to save Greece from default, with the participation of the private sector and allowing for the ratio of Greek debt to GDP to fall to 120% by 2020. The current ratio is 165%.

This would take place under a "voluntary" agreement with private lenders, whereby they would give up 50% of their investments, amounting to €100 billion.

To achieve this, the eurozone countries agreed to mobilise €30 billion of public funds to finance guarantees for the private sector. (See: "EU cuts backroom deal on Greek debt write-down")

This appeared the most difficult decision at the summit, keeping French President Nicolas Sarkozy and German Chancellor Angela Merkel, together with IMF chief Christine Lagarde and Council President Herman Van Rompuy, in long separate talks with bankers on the sidelines of the summit.

  • 3-4 Nov.: G20 and G8 meeting in Cannes.
  • 4 Nov.: Confidence vote in the Greek parliament on Papandreou's government.

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