ANALYSIS | Papandreou's referendum gamble

The response to the news that Greece may hold a referendum on the latest bailout package illustrates once again an old adage: 'financial markets abhor uncertainty.' And a rejection could unravel the eurozone.

Is the PM flirting with default, or getting his fellow Greeks to accept austerity?

Protesters, dressed as prisoners gather during an event to protest against austerity measures outside the Greek parliament in Athens, Nov. 1. (Thanassis Stavrakis/Associated Press)

George Papandreou's surprise referendum gamble — offering to put this latest European bailout plan to a popular vote in Greece — is not just roiling the world's financial markets. It has also caught his own party off guard, not to mention his European counterparts.

Last week, following many crisis-level meetings, European leaders agreed to a bailout deal for Greece. Now, they are making it clear they had no idea Papandreou would put the deal to a national vote. Papandreou's referendum call has been met with barely disguised anger in Europe and officials are scrambling to understand his motivations.

"The Greek prime minister has taken this decision without talking it through with his European colleagues," said Jean-Claude Juncker, Luxembourg's prime minister, who also heads the group of eurozone finance ministers.

Sweden's foreign minister, Carl Bildt, sounded bewildered. "It's difficult to see what the referendum is going to be about. 'Do we want to be saved or not?' Is that the question?"

The proposed referendum may well be designed to take the wind out of the anti-austerity marchers who have been battling Greek police in the streets for months now. But it is coming at an economic cost, both for Greece and the world economy.

After showing stellar gains in October, Europe' stock markets declined dramatically on Nov. 1, immediately following Papandreou's gambit, as investors fretted over the prospect of a disorderly Greek debt default and the country's exit from the euro. The DAX index in Germany lost five per cent and the CAC 40 in France was down even more, 5.38 per cent. The euro lost 3.7 per cent against the U.S. dollar from its Friday, Oct. 28, close to its low two days later.

More uncertainty in this Greek tragedy

Apparently Papandreou did not even inform his own finance minister, Evangelos Venizelos, before he announced the referendum, a Greek government official told Associated Press. Venizelos "found out about it along with all other Greeks" when Papandreou spoke in Parliament on Oct. 31, AP quotes the official, who is said to be close to the finance minister.

Greek Prime Minister George Papandreou arrives at a cabinet meeting in the Greek parliament in Athens, Nov. 1. (Thanassis Stavrakis/Associated Press)
Adding to the uncertainty of the plan is Papandreou's own future, as his announcement provoked a partial rebellion within his own party, PASOK (Panhellenic Socialist Movement).

Several deputies called for the prime minister to resign and one, Milena Apostolaki, quit the caucus, declaring that the plebiscite would be "a deeply divisive procedure." She added: "The crisis in the country has taken on uncontrollable dimensions and is threatening the cohesion of Greek society."

A confidence vote in the government is scheduled for Friday, and it's uncertain whether Papandreou can clear that hurdle, with only a two-seat majority after Apostolaki's defection.

Referendum may be popular

Then there is the referendum itself. There is no date being put forward but January seems to be everyone's best guess.

Greek Finance Minister Evangelos Venizelos. Even he didn't know about the referendum before it was announced. (Thanassis Stavrakis/Associated Press)
In his speech, Papandreou said the result would be binding and the questions would be: "Do we want to adopt the new agreement? Or do we want to reject it?"

If rejected, the bailout deal "won't be implemented," he said.

Confusing the matter further is the fact that there was no referendum on the 2010 bailout or the 2011 austerity package that the Papandreou government imposed. In fact, it would be the first referendum in Greece since 1974.

Of course, it is hard to say how the Greeks will ultimately vote. But a poll conducted on Oct. 27, the day the deal was reached, suggests support, at least, for a referendum.

Kapa Research SA surveyed 1,009 people by telephone and found that 54.2 per cent wanted a referendum on the bailout, which comes with a series of planned austerity measures, and 40 per cent felt that Parliament should decide.

About 44 per cent of Greeks surveyed told the pollster that they viewed the European leaders' decisions in a negative light, while only 12.6 per cent saw them as positive.

However, 72.5 per cent said they wanted Greece to stay in the eurozone.

Voting for the agreement 

If the referendum idea goes ahead, it is likely to bring with it months of uncertainly over how Greeks will vote as well as what the implications of the possible results might be.

The Brussels deal

The deal reached in Brussels by European leaders on Oct. 27:

  • Reduces the value of privately-held Greek government bonds by 50 per cent (termed a "haircut" for those holding them).
  • Provides a new €130 billion bailout of Greece by the European Union and the International Monetary Fund.
  • Increases the European rescue fund to an estimated €1 trillion.
  • Requires Greece to contribute an additional €15 billion to the fund from its huge asset sale now underway.

That last amount is on top of €50 billion that Greece promised earlier in 2011, a sum international monitors say Greece is  struggling to raise.

Financial historian Niall Ferguson said during a Bloomberg Television interview that, "Papandreou's government is something that defies logic: it ought to have fallen some time ago given the economic situation of Greece." 

Ferguson argues that this has not happened yet because, "the Greeks themselves aren't sure if there's a better alternative to this grim austerity."

Should the Greeks vote in favour of the agreement's terms, which are still a bit vague, it would likely help ease the crisis, assuming it is not fully out of control by then.

Joerg Rocholl, who heads the European School of Management and Technology in Berlin, labeled Papandreou's announcement "courageous."  He told Reuters Television, "If it goes well, he of course has the support of the Greek people."

That would pass responsibility for Greece's fate to its people and likely take the wind out of the sails of the massive anti-austerity movement that has been in the streets and on strike.

Rocholl did add that he is surprised that Papandreou "only now is asking for the approval of the Greek people because normally, (the government) should have travelled to the negotiations in Brussels with this approval."

However, Rocholl notes, "There is a large risk that the whole thing will go wrong."

Rejection could spread contagion

What if the Greece rejects the agreement?

When asked whether that would mean bankruptcy for Greece, Juncker answered diplomatically, "I cannot exclude that this would be the case."

Governments like those in Germany and France would have to decide whether to let Greece default, without knowing how far the contagion will spread, or risk hostility from their own voters and agree to less onerous bailout terms.

Protesters carry banners before a scheduled military parade in the northern Greek city of Thessaloniki, Oct. 28. From left to right, in German, One people, one Reich, one Euro, paraphrasing a Nazi slogan; No to a new occupation; and a Greek wanted poster bearing the photos of Prime Minister George Papandreou and finance minister Evangelos Venizelos says, Wanted by the Greek people. (Nikolas Giakoumidis/Associated Press)
The Fitch ratings agency said rejection of the bailout deal, "would increase the risk of a forced and disorderly sovereign default and potentially a Greek exit from the euro," adding, "both of which would have severe financial implications for the financial stability and viability of the eurozone."

Stefanos Manos, who was Greece's finance minister in the 1990s, expressed a similar view in an interview with Irish broadcaster RTE. "We will end up with a default and the default will push us into the drachma," he said, referring to Greece's pre-euro currency.

That could be a key issue during the referendum, given Greeks' desire to keep the euro, according to the Kapa poll.

An unravelling of the eurozone?

The dilemma for Europe in this is that austerity plans, in response to the debt crisis, reduce economic growth and growth is necessary to get governments back on their feet.

A slowing economy leads to a fall in government revenue and an increase in debt, Rocholl, for one, argues that it doesn't make, "a lot of sense to only demand a lot of saving measures because the saving measures lead to a possible economic demise."

If Greece had its own currency rather than the euro, it could deal with the debt trap by devaluing its currency and paying its creditors in that devalued currency.

Its products would cost less in the export markets, which should lead to economic growth. Imported goods would cost more, however. But that could lead to a stronger demand for domestic products.

Of course, devaluation would mean individual Greeks would be poorer relative to the citizens in neighbouring countries.

With the euro as a common currency, devaluation is not an available option.

with files from Associated Press