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Pissarides: Greek Decision to Hold a Referendum Detrimental for Eurozone

Cypriot Nobel economics laureate Christopher Pissarides has said that Greece decision to hold a referendum on its latest rescue plan will prove to be detrimental for the eurozone.

Speaking from London, Pissarides said the new developments created after the Greek government’s decision are much more worrisome for Cyprus’ banking system due to the uncertainty concerning the size of the haircut of Greek Government bonds.

According to Pissarides, a possible no vote on the Greek referendum to be held in late December, would lead the country out of the Eurozone and to a consequent default.

”This decision could cause grave damage to the Eurozone and not only to Greece itself due to uncertainty caused,” Pissarides told CNA.

Describing the deal reached on the Eurozone Summit on October 26 for a new 130-billion-euro rescue package as very good and beneficial for Greece, Pissarides said that Greek Premier George Papandreou announced he would hold a referendum without consulting with the other Eurozone leaders.

”This causes a climate of uncertainty because it is like saying that even if the Eurozone big boys agree on a policy in the Eurozone, which seems to be good, creating a positive note on the markets, suddenly the small state with the big problems says it might not accept it.”

Replying to a question, Pissarides said that Greece should have avoided this decision, given the reaction by other Eurozone member-states and the plunge in the European shares following the decision.

Noting that the Greek Prime Minister should brief his party and the opposition in Greece on the new deal and not announce a referendum, Pissarides wondered ”who could expect that the voting will be cast according to the right criteria, that is, the future of the country.”

Asked whether a rejection of the new deal in the Greek referendum would entail the exit of Greece from the Eurozone, Pissarides said in case of a no vote ”Greece cannot avoid living the Eurozone”.

”I can’t see any other solution. I can’t see the European leaders calling for another Summit in Brussels to work out a solution acceptable by the Greek citizens,” he remarked.

Replying to a question whether Cyprus, exposed to Greek sovereign debt through its banking system, should be more concerned following the Greek government’s decision, Pissarides replied affirmatively, pointing out no one could know the size of the eventual haircut of Greek bonds.

According to rating agencies, the exposure of Cypriot banks to Greek debt amounts to around 165 per cent of the island’s output. European Banking Authority stress tests consider that Cyprus would need an additional capital of 3.6 billion euro to increase the Banks’ Core Tier 1 capital above 9%.

”In case of a no vote in the referendum Greece, would be forced to leave the eurozone and default on its debt, the Greek bond haircut would not be 50% but 100% or in any case above 50%. This is a more serious situation for the banks,” Pissarides noted.

”The latest developments are much more worrisome for our banking system than some days ago because I believed that (German Chancellor Angela) Merkel and (French President Nicolas) Sarkozy would reach to an agreement,” he said, adding ”But now our confidence lies with the Greek voters.”

Invited to comment on the rising tendencies in unemployment in Cyprus and whether this is fueled by the current uncertainty, Pissarides pointed out that recession fuels unemployment, whereas the Cypriot economy has made backward steps, following the huge explosion in a munitions cache last July which crippled the island’s main power station.

Noting that Cyprus could increase state spending to stimulate employment, Pissarides pointed out however that the island could not risk high deficits due to the danger of downgrades by rating agencies.
(source: cna, famagusta-gazette)

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