Greek Prime Minister George Papandreou’s surprise announcement will ask voters to decide the fate of international bailout loans and his wobbly Administration through a referendum sent shock waves through the markets, rattling Wall Street, angering European leaders who just agreed to let the country write off half its debt and could even lead to a return back to the drachma from the euro, critics said.
Political rivals accused him of “blackmail,” by asking the Greek people to support the pay cuts, tax hikes, slashed pensions and layoffs he has imposed on orders of the Troika of the European Union-International Monetary Fund-European Central Bank loaning the country $152 billion to stave off bankruptcy. Investors and banks also agreed to let Greece write off half of that debt and a second bailout of $157 billion was in the works.
All of that is now in jeopardy and Papandreou’s bombshell was the talk of the markets and world political leaders, catching them – and even his own Finance Minister, Evangelos Venizelos – by surprise, at a time when the finance chief was in the hospital for treatment of stomach pains. Even his own Socialist PASOK party was thunderstruck and six of its members said he should resign. One PASOK MP left the party, leaving Papandreou with only 152 members in a body of 300 Parliamentarians. Papandreou said he needed support for the austerity measures. The conservative rivals called for snap elections. “Elections are a national necessity,” opposition New Democracy party leader Antonis Samaras told reporters.
Wall Street fell sharply on fears Greece would unravel and that the referendum would threaten the bailout plans. Papandreou had previously denied reports he would call for a referendum, just as he had denied stories he would seek a restructure of Greek debt and ask lenders to take a soc-called “haircut,” all of which came to pass. A survey carried out on Oct. 29 showed that nearly 60 percent of Greeks viewed the agreement on the bailout package as negative or probably negative. “They must be crazy… this is no way to run a country,” a senior executive of one of Greece’s biggest firms, speaking on condition of anonymity, told Reuters.
Analysts said if Greek voters reject the unpopular bailout, it would result in a “hard default” by Greece, causing bigger losses for banks and raising the threat of systemic risk. “This was completely unanticipated … it is not needed and it is just sort of an internal political thing,” said John Canally investment strategist and economist for LPL Financial in Boston. “This vote in Greece is going to hang over the market for next week or so, unfortunately.”
Greece could potentially face bankruptcy if the population ends up voting against the EU’s latest financial aid package in a referendum, said Jean-Claude Juncker, leader of the Eurozone, the countries using the euro, said. He told RTL radio that the referendum plans piled “great nervousness and insecurity” on top of an already highly insecure situation. “I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greek people will vote on.” He added, “It is something that brings a great nervousness, that adds great insecurity to already great insecurity and therefore we need to see calmly how we will deal with this.” Asked whether a Greeks “no” vote would mean bankruptcy for Greece, Juncker responded, “I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greeks people will vote on.”
French President Nicolas Sarkozy was said to be irked as he had helped broker the haircut deal for Greece. “The Greek action is irrational and dangerous from their point of view”, one of Sarkozy’s close aids told Le Monde newspaper. French sources said the Germans are also said to be “stunned” by Papandreou’s move. In Germany, Rainer Bruederle, Parliamentary floor leader for the Free Democrats Party (FDP) that shares power with Chancellor Angela Merkel’s conservatives, said that it sounded to him like Greece was now trying to backtrack on the deal with EU leaders. “I was irritated (by the news),” Bruederle told Deutschlandfunk radio, according to Reuters. “That’s a strange way to act. 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. This sounds to me like someone is trying to wriggle out of what was agreed — a strange thing to do,” said Bruederle, who was economy minister for most of the last two years before taking over the leadership of the FDP in Parliament.
He said there was only one solution: “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 fulfill the agreements, then the point will have been reached where the money is turned off. Then they’ll have a state insolvency and then one will have to combat the fear of contagion for the European banking system that can result from that,” said Bruederle.
Joerg Rocholl, President of the European School of Management and Technology in Berlin, told ZDF television that Greece’s retreat from the agreement could mean that other countries no longer feel obliged to take part in the rescue. “It’s a very surprising as well as courageous decision … because if it doesn’t work out — and that’s the way it’s looking right now because there is considerable resistance among the Greek populace — it could mean that other countries don’t feel obliged to fulfill their promises.” Rocholl said some EU countries could feel free to retreat from their vows to contribute to the Greek rescue. “That could mean that Greece can’t remain in the euro,” he said.
Swedish Foreign Minister Carl Bildt said he was shocked at the news. “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?” Business executives in Greece expressed despair at how the country was being run and markets speculated on whether Italy will be the next euro zone country to slide into a debt crisis.