An outline of critical events affecting Greek Referendum

Now that we have had a chance to digest the information from last night, there are a number of developments to report on the Greek situation which are relevant to unravelling likely scenarios going forward. Here is my synopsis of what has happened followed by some comments on the implications.


  1. Greek Prime Minister George Papandreou called for the deal hammered out in Brussels on 26 October to be put to a general referendum. He was not specific as to how this referendum would be worded and what exactly would be put to a vote. Moreover, Papandreou failed to alert key leaders in his cabinet and European political leaders of the referendum decision.
  2. The reaction by other euro zone leaders was one of consternation. In the Netherlands, despite coalition and opposition anger over the Greek referendum, the Dutch government won time on putting the euro bailout deal for a parliamentary vote until the details of how the euro zone rescue fund would operate.
  3. The leaders of Germany and France jointly met with the Greek PM. Afterwards, they stated that they would rather have Greece within the euro zone but that Greece needed to decide if it wanted to remain in. They also said maintaining the integrity of a rump euro without Greece was more important than having Greece as a member. Euro stability is paramount. Germany and France want Greeks to vote on whether to stay in the Euro (polls show 70% support the Euro), and not just hold a referendum on the latest package.The leaders confirmed that no aid would flow until the referendum is decided.
  4. Meanwhile, the Greek military’s leadership was completely overhauled, leading to rumours that Greece was forestalling a military coup. Others have since said this move is standard protocol for a Greek government preparing for its potential loss of power and that the changeover had already been decided upon previously.
  5. The Greek Finance Minister today came forward with a statement at the Cannes Summit indicating his lack of support for a referendum. “Greece’s position within the euro area is a historic conquest of the country that cannot be put in doubt. This achievement by the Greek people cannot depend on a referendum.” Some other cabinet ministers have sided with the Prime Minister.
  6. However, some MPs have defected or are threatening to do so, which would end Papandreou’s majority and force new elections. Rumours on European newswires were that MPs were gathering signatures to force Papandreou to step down immediately. The BBC has now reported that Papandreou is expected to hand in his resignation.
  7. In Italy, the cabinet did not get an emergency decree on austerity measures through. Andy Lees of UBS reported that Susanna Camusso, head of CGIL, Italy’s largest trade union, reacted saying that Italy will have to attend the G20 in Cannes “without a credible leader and without the decisions which have been promised but not taken”. These comments are further evidence that Berlusconi is in the same precarious predicament that Papandreou is; the Italian government could fall. Lees also wrote that the “opposition Democratic Party said it will try to force a decision in parliament next week if Berlusconi does not resign beforehand.” They stated: “We are ready to assume our responsibilities and to support a new government with an agenda for reform and cutting the debt”.
  8. Even so, Italy’s economy has started a nasty double dip. The Telegraph’s Ambrose Evans-Pritchard notes that “Markit’s manufacturing index for Euroland dropped well below the break-even reading of 50 in October. The data for Italy plunged five points to 43.3, the biggest drop since the survey began in the 1990s.” New orders, both in total and for export have collapsed.
  9. Contagion is most notable outside of Greece and Italy in Belgium. Belgian newspaper De Tijd reported yesterday that Belgian yields were a euro-record 263 basis higher than German yields as German yields had crashed to 1.77%
  10. US banks actually increased sales of credit default swaps insurance on the European periphery in the first half of the year, indicating that US bank exposure to defaults in Europe is high. Goldman, JPMorgan, Morgan Stanley, Bank of America and Citi account for 97% of this market. According to Bloomberg, Goldman, Morgan Stanley and JPM are known to be the leading underwriters.

In the markets, Italian bond yields are now at post-euro area highs around the 6.39% level. New collateral rules would go into effect at 6.50%, so we are hitting the danger zone. Asian markets tumbled on weak economic data and reaction to the Greek crisis. But European equity markets have moved higher. French and Spanish governments are due to issue debt and we will then get a chance to see the market reaction.

My thoughts:

  • Would the Greeks reject the bailout if put to a vote? It is hard to see the vote passing as it means a decade of austerity. On the other hand, a referendum for staying in the euro zone in conjunction with the one on the present deal could pass.
  • I don’t see how the Greek FinMin’s move to call off a referendum would be successful. Now that this opportunity was given to the Greek people, the concept that the right to vote would be snatched away (in the cradle of Democracy no less) is a blow that would almost certainly lead to riots and mass civil unrest. The referendum realistically has to take place in my view. The question is more what will be in the referendum. Will it be a narrow issue of the recent Brussels bailout or a larger issue around EZ membership.
  • I think France and Germany are done with Greece. I have always said they would cut Greece loose if they create problems for the larger periphery economies of Spain and Italy. They want to use them as an example pour encourager les autres and worry about ring-fencing the problem at Greece, fixing the banks, and getting Italian yields down. The ECB is the real question mark here. EZ banks are now applying pressure, saying bank liquidity and credit is gone without ECB monetising debt.
  • The Greek and Italian governments look weak. Both could topple soon – and eventually will. I doubt that Italy will push through austerity soon, especially if the government is toppled. That means that Italian bond yields will march higher and the euro zone will be in an existential crisis. The threat of an Italian default is Armageddon for euro zone banks and would lead to a mass insolvency. US banks would be affected too – through the credit default swaps market. This puts the ECB and the euro zone to the crucial test.

Those are the latest thoughts. I updated this post with links and refined it somewhat as data became available through to about 1100AM EDT. But I have now finalised it and will hit the send button to get it out. Please follow me @edwardnh on Twitter for more recent developments.

  1. Dave Holden says

    Wording something like “Tick Yes to stay within the bountiful and benevolent confines of the Euro and tick No for eternal damnation”

    What does EZ stand for?

    1. ChrisBern says

      EZ = EuroZone

  2. PLB says

    PM Papadreou resigns
    Pasok and ND’s Samaras stay in EZ – no referendum on bailout – maybe ref on EU/EZ membership
    In return, Troika agrees to renegotiate bailout package
    Berlusconi follows Papadreou path –
    Can is kicked down the road one more time
    All blows up in 2-3 mths

  3. The_Invisible_Hand says

    When the Papandreou government falls, I don’t think there is any way to predict what will happen after that. At least internal to Greece itself.

    Many Greek citizens themselves are not in favor of a referendum. They want new elections instead.

    Of course, many Greek citizens ARE in favor of a referendum. And its an open question what they will do at this point if they don’t get one.

    Personally, I believe that when Papandreou is gone, Greece simply won’t have a government anymore. At least not in the traditional sense. At that point, Greece will have become “ungovernable”.

    And even if they approve the EZ “deal” in the parliment post-Papandreou, it will simply be window dressing. They won’t be able to enforce any of its provisions on the Greek People.

    But the EZ “deal” was always a Trojan Horse being wheeled onto the Greek landscape; so to speak. And I think most people understand that. Just buying time for some EU banks to build up capital and protect themselves from the eventual Greek default, governmental collapse, and exit from the Euro. It just seems like all that may come a little sooner than was hoped.

    Greece was always expendable.

    The only thing anyone outside of Greece was ever concerned about was avoiding a CDS event vis a vis Greece. And I imagine those kinds of conversations will be front and center at the G-20.

    1. David Lazarus says

      The avoidance of triggering a credit event was the only consideration. It was extend and pretend from day one. Why else would they give such tiny sums to keep the government going? If they had really wanted to sort Greece out they should have given them enough to get tax revenues on a sustainable basis.

      The contagion to Italy has already happened. The issue is whether they can see the symptoms. Austerity will be much harder to impose on Italy, so what will France and Germany do then? They cannot cut Italy loose as easily. Exports to Italy would collapse and that would create problems in Germany and France.

  4. PeterB says


    If the assumption that the sovereign and private debt problems causing a worldwide crisis will not be resolved until huge quantities of debt is wiped out, is correct.

    Is a default by Greece, Portugal, Ireland and others an extremely painful yet fastest path back to growth ? Is it not then the least worst outcome ?

    1. Edward Harrison says

      That’s certainly the conclusion I draw. You run into the distribution problem that Andy Xie was talking about though. Really this is about debtors and creditors trying to divvy up the expected losses. We live in creditor-friendly societies because creditors are the ones with money and access to power. So whenever repayment to creditors is threatened, they use their perch to try to force as much repayment as the system will bear. That is what we are witnessing now. If we let Portugal, Greece and Ireland off the hook too easily then the creditors would have to take losses and be bailed out. Even if that is the fastest route to a clean slate, it will be resisted.

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