Greek Referendum: If the bailout goes down, what then?

1st November 2011

Eurozone leaders agreed a 50% debt write-off for Greece last week as well as strengthening Europe's bailout fund, but stocks plunged today as news that Greece will hold a referendum cast doubt over the deal's approval. London's FTSE 100 index of leading shares dropped more that 2%, with markets in Germany falling, France, Spain and Italy sliding between 2.7% and 4%, reports the Daily Telegraph.

Opinion polls in Greece suggest that most people do not support the deal, reports the BBC. Greek Prime Minister George Papandreou told a meeting of his governing Socialist party that Greek people would have the final say on the package, which is designed to reduce Greek debt by about 100bn euros through a series of measures including public sector pay cuts, tax rises and falling pensions.

The referendum would be unlikely to take place before January, which would create months of uncertainty for the markets. Here are some questions Mindful Money wants answered on this news:

So why did Papandreou announce plans to hold a referendum, rather than just go along with the bailout?

Joe Weisenthal says on the Business Insider blog: "The buzz from Greece, according to one European trader we spoke with, is that it's an ego thing. Papandreou was publicly jeered on Friday, and that may have set him off: In other words, the referendum call is basically a way to say to the Greek people: Fine, you don't like the way things are going, take responsibility for staying in or leaving the euro into your own hands."

Mindful Money's economist blogger Shaun Richards says on his blog: "If we look back we can see that Mr. Papandreou won a vote of confidence about a new set of austerity measures in June and that there had been speculation about a referendum on the bail out around a month ago. So whilst the tactics were not a surprise the timing did catch markets somewhat unawares. It also comes on the heels of an opinion poll in the newspaper To Vima which suggested that 60% of Greeks were against the new deal."

Does this mean the bailout is definitely going down?

On the Financial Times (paywall) The World Blog, Gideon Rachman says: "The shocked reaction in the markets to the news that Greece will hold a referendum on the latest bail-out deal is entirely appropriate. That is because the Greek referendum would be a hammer blow aimed at the most sensitive spot of the whole European construction – its lacks of popular support and legitimacy. It has been clear for some time that politicians at both ends of the euro-crisis – debtors and creditors, Greeks and Germans – have huge trouble bringing their electorates with them. As the crisis worsens, so voters will become more bitter and disillusioned. Allowing them a direct say, through the ballot box, will be a certain way of ensuring that the deal unravels…

Finally, he asks: "So, unless Mr Papandreou can somehow back off his referendum pledge, the bail-out deal is going down. And then what?"

Rainer Bruederle, a senior member of Chancellor Angela Merkel's collation in Germany, told Deutschlandfunk radio, says the BBC, that the only thing to do now would be to prepare for the Greek state to be insolvent and try to limit the damage to Europe's banking system.

Meanwhile, Tim Stevenson, Director of European Specialist Equities at Henderson, says the news it is a big step backwards and a major disappointment from the optimism of last week after the agreed aid package was announced, and suggests that Europeans may force Greece to vote on whether it wants in or out of the euro, rather than if the bailout package.

He says: "There is no doubt that this is a serious step backwards in terms of the progress made last week. If the whole of this plan is held to ransom by the Greeks saying ‘shall we or shan't we' accept a pretty generous deal on their particular debt this will put everything on hold…It is a big disappointment…quite how the Europeans react remains to be seen, as they may well say to Greece that if it wants to turn around and vote on plans so far then they may well suggest this turns into a vote on whether Greece wants to be in the euro or out of the euro. The expression ‘make my day, punk,' does spring to mind in light of that particular decision. I had not expected the Greeks to take this particular plan of action."

Shaun Richards comments on the problems with pensions, battered bank shares, and high unemployment that Greece faces on his blog. He adds: "We can see that the regular theme of a deteriorating Greek economy is continuing and last night we saw yet more political uncertainty being added to it."

There may have been a massive sense of relief that the European leaders finally managed to come up with a deal for the European sovereign debt crisis last week. But Shaun says that while people are now asking whether the deal will survive, the real question should be:

The agreement may have unwound already – but what impact would it have had anyway?

When the bailout package was agreed, Shaun wrote on his blog: "Negotiations here went on and on and must have been somewhat fractious. The result was that private-sector bondholders were "invited" to take a 50% haircut or reduction in their holdings o
f Greek government bonds.

"I will leave readers to mull on the use of words such as voluntary and invited and reinforce my message that even if you believe that this will reduce Greece's national debt to Gross Domestic Product ratio to 120% by 2020 this is approximately the level that has Italy in trouble right now. Remember that is the best scenario! It is also 8 and a bit years away so we have a definition for how far they feel they need to kick the can into the future. Indeed if we look at the wording they do not seem entirely sure themselves…

"…Greece has more burdens placed on her in return for a haircut which leaves her looking insolvent, albeit maybe a little less insolvent, than before. That is of course assuming that all of this actually happens!"

More from Mindful Money:

Creativity and financial crisis: Will this provide the answers?

Capitalism in crisis: Time to turn to new ideologies?

Economic crisis: What is the end game?

To receive our free email newsletter sign up here.

Leave a Reply

Your email address will not be published. Required fields are marked *