Greek referendum could mean CDS Greek default trigger

I think Tim Duy’s recent post title “Did The European Deal Just Collapse?” is the right one. He sees the shock Greek referendum announcement as a big problem not just for Europe, but for the US and elsewhere:

The cracks began appearing before the ink was dry.  More worrisome is that the Greek leadership didn’t even believe they were on board in the first place.  Simply put, the world economy is no less fragile than it was a week ago.  And in that fragility still lies the recession risk for a still struggling US economy.

The FT reported on the referendum as follows:

Greece’s prime minister unexpectedly announced a referendum to approve a second EU bail-out deal for his austerity-hit country, less than a week after it was agreed with international creditors at a European Union summit.

George Papandreou made the pledge on Monday night in a speech to lawmakers in his fractious PanHellenic Socialist Movement (Pasok) party but did not set a specific date for the vote.


The premier’s move reinforced concerns that Greece’s fraught domestic politics are spiralling out of control amid growing popular anger over public sector job cuts and tax increases. Strikes and violent demonstrations have become frequent in Athens and other cities.

The referendum also looked likely to cause alarm in Brussels, Paris and Berlin after Mr Papandreou’s assurances at Wednesday’s summit that Greece was determined to maintain a steady pace of reform.

The reason for the alarm is that the Greek citizenry is not in favour of the bailout agreed to in Brussels last week. The FT reports that 60% of Greeks would reject the deal.

For Mr. Papandreou, this is certainly the right political call. He knows that austerity is deeply unpopular in Greece and risks a veritable civil war of social unrest. This particular bailout agreement is likely to be even more unpopular due to the permanent presence of the EU, IMF and ECB to ensure compliance with the approved austerity programs. From a political perspective it makes sense to put these measures to a referendum to ensure their political viability in an already volatile social environment.

The need to enhance the political legitimacy of these agreements is all the more necessary given the widespread perception that the EU apparatus is now seen by many Europeans as deeply undemocratic. For example, in Germany where anti-bailout sentiment is rife, many are aghast at the amount of money used to support the periphery economies in particular because the euro was never voted upon by the German electorate in a referendum. Another example comes from the present European Constitution, the Lisbon Treaty. Ireland voted ‘No’ on the Lisbon Treaty. Yet, inexplicably this vote was retaken in order to achieve passage. Many in Ireland believe this makes the current ‘Reform Treaty’ illegitimate.

Given Greek sentiment, in all likelihood, a referendum vote for the bailout agreement will fail. The question is “what then?” I would anticipate that, at a minimum, an actual default which triggers credit default swaps with higher bondholder losses is likely, crystallising losses across the European (and American) banking system. Greece and its banks would be insolvent.

At that point the questions would go to contagion. Italy’s re-coupling to the periphery is well-advanced, making it now the focal point of the sovereign debt crisis. Meanwhile, the euro zone has probably already started a double dip recession which will cause Portugal and other periphery economies to miss their deficit targets. There are, therefore, a number of other weak points were contagion could spread: to periphery sovereign bonds, to the banks of those countries, and to the banks elsewhere most exposed to them.

The ECB will be forced to intervene. However, the damage could still be done before it does so.

  1. Catherine MacArthur says

    Hello Edward,
    I just would like make you aware of my observation that results in me not being able to read your articles on myiPad when they appear on ‘Credit Writedowns’ because I can’t ‘pinch and enlarge’ the text. Perhaps you could mention to your people who design your this blog if it’s a blog, or publish in larger font. I can always read the people you pass on though!

    1. Edward Harrison says

      Catherine. Aware of that problem. Working on a fix. Thanks.

  2. Matt Stiles says

    And will the Bundesbank give ascent to monetize peripheral debt?

    Round and round we go on the merry-go-round of impossibility.

    I smell another summit.

  3. Edna Millay says

    I don’t know that it makes sense politically. If the question really is if Greece should accept the terms of the agreement, most would vote no. But if the question is if Greece should stay in the euro, that would be a difficult call. In the latter case, I suspect the opposition and other parties would ask Greeks to boycott the referendum because they would say those are not the only two choices– that is, to stay with Papandreou in the euro, or to have another leader and leave.

    1. David Lazarus says

      Politically it makes a lot of sense. The Prime Minster would get soundly ejected at the next election but this will give him much more support from the public. If they effectively allow the nation to be raped by foreign bankers then they would need helicopters to leave the country. They would be seen as acting for their own self interest rather than the nations.

      I do think that triggering a wave of CDS claims would be best of all. It would allow a cleansing of the financial system. It might give renewed pressure on proper financial reform.

  4. Oldrich says

    A fitting movie from a not so distant Greek history :

    Remember that Greece has a very strong army and there is definitely a tradition of military government, civil unrest and even of civil war…

    1. David Lazarus says

      This is also very relevant. Debtocracy.

  5. fresno dan says

    for some reason, the whole Greek snafu reminds me of the “Peanuts” comic strip, where Lucy will hold the football, and Charlie Brown will try and kick it, and than Lucy pulls the football away. And than, time after time after time….. Lucy offers to hold the footballl, and promises, with ever more elaborate rationale as to why she will not pull the football away THIS time, after Charlie Brown points out how she continually pulls the football away. But than he tries to kick the football….and Lucy pulls the football away.

    Wow…who knew there was a whole Wiki devoted to Peanuts?

    How many times does this have to happen before its just farce? (the Greek bailout, not Peanuts)

  6. A. Livieri says

    Papandreou is a real politician, he is sure, and he is right, that the referendum will be approved. Opposition parties, except communist, will be oblige to choose between, default or accepting the troika memorandum. Their survival, will turn them in a “yes” and the fear of the drachmae, will push the mass of conservatives in the yes.
    The real problem is that , PASOK, is turning again to a “third road” party, with so much power with the new laws, that a democrat future for this country does not exist.

    1. David Lazarus says

      But if democracy disappears in Greece that will also panic other debt laden economies. If unelected politicians from outside the nation can impose unsound policies on a country what hope do they have? Austerity never works, and is only a short term solution for bankers. As you kill off the economy through austerity the vitality of the economy disappears. The problem globally is that high asset prices raises significantly the cost of new businesses being created.

  7. fresno dan says

    So Mr. Harrison – when are we going to get your analysis of MF?
    What I am really interested in is this: Are Corrzine and these guys smart, or is it really just a charade?
    Of course, did anybody who “invested” in MF really know what was happening or how they really proposed to make money? Really???
    The Fed prints (creates) money (liquidity – lets use fancy terms, because straight forward words are too simple), it goes through primary dealers, and everybody can be levered 40…or is it 80??? to one.
    That leverage thing seems….so….2008.

  8. Stuart says

    Referendum has no legally binding effect. The outcome will also depend on how it is worded. “Do you support 50% haircut for the evil creditors?” or “Do you support the austerity measures imposed on Greece?”

  9. The_Invisible_Hand says

    Greece is becoming ungovernable. In its present situation, its highly unlikely it will be able to abide by the Eurozone “agreement” anyway. People in Greece will simply not accept the austerity conditions. And will refuse to pay the any new taxes. Many organizations are already publishing material on how to avoid doing so.

    Somehow, legitimacy for decisions made relative to the direction Greece takes must be garnered.

    Papandreou is correct. The Greek People must decide. Then, THEY own the outcome. One way or the other.

    If a national referendum gets that done, then so be it.

    1. David Lazarus says

      It is not as if they have not taken the advice of the troika before now. They have spent three years in austerity and it simply gets worse. Yet the Troika say you are not doing it hard enough. Enough is enough. Greece will not be the last to collapse. Mismanagement by leaders in their own self interest will condemn more to collapse.

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