Implications of the Greek referendum proposal: Delay, not Default

On Monday, October 31, the Greek Prime Minister announced that it was his intention to lead Greece into holding a referendum, sometime in December 4 or 5, on whether to accept the recent bailout and debt haircut, according to major news outlets [EUObserver, Bloomberg, Reuters, Express(Greece)]. At first I thought it pass. Then I feared it wouldn’t. Finally I realised it didn’t matter. Here’s why.

Initially I thought this would pass. My reasons were that:

  1. It is a referendum on whether Greece should accept €130b in bailout and 50% cut to debt agreed last week by Euro-zone leaders, which would benefit the Greek taxpayer, while keeping it in good terms with the rest of the EU who struggled to get this agreement together.
  2. Contrarily to what Bloomberg seems to imply, it is not a referendum on whether the country should default: “European stock futures fell, indicating the Stoxx Europe 600 Index will extend its biggest drop in four weeks, as the announcement of a Greek referendum spurred concern that the country may default. U.S. index futures and Asian shares also retreated.”

Of course, this would depend on how the issue is portrayed in the media and how the parties campaign for it. It was only when I got to think about this that it started to dawn on me that it was not a clear cut deal.

Opposition Posturing for Elections…

According to these reports, the ND has been vague. They protest the decision, but do not necessarily favour a no vote. Their immediate move is to push for snap elections in the upcoming meeting with the Greek President. They don’t want to leave the EU or the bail out. They want to be in power, like the PSD did in Portugal. However, whereas in Portugal the Socratic center left  government did not have an outright majority in Parliament, the Papandreou government does, feeble though you and I may find it. This makes it harder to get rid of it.

… because it is ahead in the Polls

In June 2011, the ND surpassed the PASOK in political support for the first time since August 2008 and is probably further up now, 5 months later. This probably leads them to overestimate their own eligibility and push harder for elections than they should:

Clearly however, no one would have an outright majority of the vote, so it would still be a pretty turbulent political sea to navigate through.

Greek EU and Bailout Policy Stance

The ND is not Eurosceptic and as far as bailout policy and the EU is concerned, it  and PASOK are too similar to tell apart. The issue is complicated because the largest holders of Greek sovereign debt are the Greek banks and citizens, so hair cuts affects them most. You can campaign in favour of accepting the deal because it’s the Greek’s wealth. Rejecting assistance hurts Greece more than any other country (although Cyprus is close behind).

The above figure attempts to illustrate that point. The data on exposure to Greek sovereign debt comes from the Guardian Datablog, which I have attempted to update to take into account the BNP Paribas and Dexia 21% haircuts to their assets. Equity data corresponds to September 2011 and is taken from the ECB Statistical Warehouse, following the path: “Economic Concepts” -> “Money, banking and financial markets” -> “MFI balance sheets” -> “Assets” -> “Shares and other equity” (I’m not quite sure that this is a complete measure of the Equity held by the MFIs of the Eurozone. If you know better please let me know.)

Empty European Threats (Updated 03-11-2011)
I believe that the Franco-German threats that this is referendum is to be interpreted as one on EMU membership are empty ones.  I don’t believe they carry any credibility as both countries’ banks are quite heavily exposed to Greek sovereign Debt. The figure below extends the previous description to the rest of the relevant European countries.

I believe that these statements were made to scare voters into approving the bailout and because the leaders look tough. As the Americans say, “when push comes to shovel” I believe that France and Germany would withdraw these comments, and go back to the negotiating table to get the same agreement with a (purely aesthetic legal ) change, calling it the ultimate solution to the crisis, a victory for democracy, etc.

The Games of Chicken  (Updated 03-11-2011)

All of this makes for interesting political back and forth. The ND’s Samaras will probably say to the president he will campaign for yes vote in referendum if his old flatmate, Papandreou, and his government resign. The latter will not resign because he believes ND will not oppose referendum and is only bluffing. As this vote is supposed to give him cover for the rest of his mandate, if his side wins it, he wants to co-opt the opposition and the Greek electorate into supporting one of his measures and by extension legitimise his government. So they’ll play chicken until one of them, probably Samaras, blinks and no elections are called.

Party Fractionalisation and the Confidence Vote (Updated 03-11-2011)
This however is only a partial picture. Although a practical abstraction, treating parties as monoliths of homogeneity and stability can be misleading. The same power struggle between Papandreou and Samaras is also happening within PASOK as Papandreou fights to maintain the leadership and control of his party. This decision was a very risky bet for Papandreou, who is loosing support at an incredible rate. As far as I have understood it, he faces opposition from 4 different PASOK politicians:

  • Veniselos, the finance minister, argues that “internal political balances and the future of individuals and political parties of this country is not what matters. What matters is to save and recover the country through the only doable process which is included in the decision of Oct. 26. Greece’s position within the euro area is a historic conquest of the country that cannot be put in doubt. This acquis by the Greek people cannot depend on a referendum.”
  • Milena Apostolaki, a former minister wrote to the Prime Minister and to the Speaker of the Parliament resigning from PASOK over this issue. The BBC reports that two other PASOK MPs have also resigned.

As a result of this internal struggle it is possible that Papandreou will not be able to get the votes necessary to survive the motion of confidence scheduled for the Friday, November 4, at midnight. If that were to be the case, this entire discussion would be rendered mute as the referendum motion would never be brought before parliament. I would not discard the possibility of a Venizelos led Government, one of National Unity as called upon by Dora Bakoyannis.

Binding referendum and the danger of Protest voters

The problem with this little dance is that a referendum such as this one, on a serious social issue, is binding in Greece, so long as turnout exceeds a 40% threshold. So it’s a bit of a dangerous game to play. If a referendum is indeed called, I don’t expect either of them to campaign convincingly in favour of the measure. There’s a risk (as always) that voters will use this vote to protest, much like the French did with the EU constitution in 2005. According to Reuters “Nearly 60 percent of Greeks view Thursday’s EU summit agreement on the new bailout package as negative or probably negative, a survey showed on Saturday”. This should not be surprising as it’s probably the fourth such bailout agreement. Anybody would be tired of this patchwork of “solutions”.

Referendum delays bailout, but it does not impede it

But all hope should not be lost. If they reject it, they are not rejecting the EU. They are not rejecting all bail outs. They are just rejecting this specific one. Any change to the deal before the Greek parliament should be treated as a different agreement and its approval would not necessarily be illegal vis-a-vis a rejection in the referendum. This will take time and scare off markets. Papandreou would be forced to call elections and resign. The situation would be very similar to the one in Slovakia, whose parliament  blocked the July 21 EU Council agreement before it approved it once the government had resigned and new elections had been called. In the end, where there’s will, there’s a way.


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