Apparently a spasm of democracy, no matter how potentially catastrophic it may or may not be, has broken out in Greece. In apparent defiance of a deal worked out last week among members of the European Union (EU) and the International Monetary Fund (IMF), Greek Prime Minister George Papandreou has called for a referendum, allowing the Greek people to decide whether or not they want the deal. Thus, the Oct. 27th pact, comprised of a second bailout of $178 billion along with a commitment by bondholders to accept a 50 percent writedown in Greek debt, remains very much in limbo–along with Mr. Papandreou’s future. Six members of the Prime Minister’s socialist Pasok party have called for his resignation, and party defections leave him in control of only 151 seats in the 300-seat parliament.
“If it continues with Papandreou and the referendum, we will end up with a default and the default will push us into the drachma,” former Greek Finance Minister Stefanos Manos said in an interview with Dublin-based broadcaster RTE today. “The referendum call puts in jeopardy the payment of the next installment of bailout funds by the International Monetary Fund and the European Union,” he added.
Before a referendum can be held, the government itself must decide whether the details of the bailout package meet their approval. The process surrounding a vote of confidence is scheduled to begin today and conclude by the end of the week. While it unfolds, Mr. Papandreou is traveling to Cannes to meet with 20 European leaders to discuss the crisis. And despite the political opposition surrounding a referendum, Papandreou remains defiant. “For the new agreement, we must go to a referendum for Greeks to decide,” Papandreou told Pasok lawmakers Monday. “Democracy is alive and well and Greeks are being called to rise to a national duty beyond the regular electoral processes.”
Where do the Greeks themselves stand? A Kapa Research SA poll of 1009 people taken on the same day the bailout package was finalized, revealed that 44 percent saw the deal as “negative.” Another 15 percent said it was “probably” negative. Furthermore, 76 percent said Mr. Papandreou should seek an “enhanced majority of 180 votes” in parliament for the package, and a majority agreed with the idea of a referendum. As for the referendum itself, 46 percent said they’d vote against the plan, which cuts Greece’s debt ratio to 120 percent of gross domestic product by 2020 from about 170 percent for next year. Yet in an apparent disconnect, more than 70 percent said they wanted Greece to remain in the EU.
Alexander Stubb, the Finnish minister of European affairs and foreign trade, put it in starker terms. “The situation is so tight that basically it would be a vote over their euro membership,” he warned. “Greece has committed to a new program which includes structural reforms. All of a sudden, if they vote against those reforms, then Greece is the one who violated the agreement.”
Germans were very angry. “You can’t help thinking that they should be grateful as Europe is trying to help,” said Konstanze Pilge, a 26-year-old student. “Now it looks like they are going to mess things up.” Wolfgang Gerke, a banking professor and president of the Bavarian Financial Centre think tank, was even more irate. “It just goes to show once again what a huge mistake it was not to throw Greece out of the eurozone at the start,” he fumed. Rainer Bruederle, a leader in German chancellor Angela Merkel’s coalition was equally upset. “One can only do one thing: make the preparations for the eventuality that there is a state insolvency in Greece and if it doesn’t fulfil the agreements, then the point will have been reached where the money is turned off,” he explained. “The prime minister had [agreed] to a rescue package that benefited his country. Other countries are making considerable sacrifices for decades of mismanagement and poor leadership in Greece–wrong decisions were made and the country maneuvered itself into this crisis,” he added.
While Mr. Bruederle is correct in one sense, he is being utterly disingenuous in another. There is little question that Greece has been a fiscally irresponsible nation, especially in comparison to Germany. But it was precisely the willful determination to ignore such differences in culture, history–and fiscal acumen–that allowed for the formation of the European Union in the first place. Furthermore, the unstated (and unseemly) reality is that if Greece’s troubles could be isolated from the rest of the EU, they would have left them to their own devices a long time ago. Greece’s economy is quite small with a GDP of about $300 billion, and $470 billion in public debt. Such debt is large relative to the Greek economy’s size, but it represents less than one percent of global debt.
The real trouble centers around the idea of contagion. The possibility of a Greek default elevates the possibility that other, far larger European countries, most notably Spain and Italy, also wrangling with massive amounts of debt, may also be unable to pay back their loans. When investors question the ability of any borrower to make restitution, interest rates on those loans invariably rise. Thus it is hardly surprising that yesterday, Italy and France’s 10-year borrowing costs climbed “to the highest levels relative to benchmark German bunds since before the creation of the euro in 1999,” according to Bloomberg Businessweek.
Another element of contagion is credit default swaps (CDS), which are financial instruments that are insurance against non-payment of outstanding debt. For example, financial institution A lends Greece money and pays a premium to financial institution B which, if Greece defaults must pay off institution A on the remaining debt. A concentration of CDSs at a particular institution could put it at greater risk than the institution which originally lent Greece the money. Furthermore, since CDSs are not transparently traded on open exchanges, no one really knows who’s holding what.
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