By the Editors Nov 2, 2011 3:24 AM GMT+0700
The country that invented drama and democracy is not disappointing the world on either front. Greek Prime Minister George Papandreou on Monday called for two high- stakes votes.
The first asks parliament to say by the end of this week whether it has confidence in his leadership. The second is a referendum in which Greek voters would approve or reject, possibly by year’s end, Europe’s latest debt-crisis workout.
The move blindsided European leaders on the eve of a global summit and rocked lawmakers in Papandreou’s party, some of whom are now calling for him to step down. The next day, stocks tumbled worldwide, the euro declined and Italian bonds plunged.
No doubt, Papandreou’s gambit is extremely risky. He has only a three-seat parliamentary majority. And the referendum, if rejected, could push Greece into default and out of the European Union and the single currency. A doomsday scenario could follow, including financial market mayhem, soaring sovereign borrowing costs and cascading bank failures. Europe and the U.S. could fall back into recession.
Still, it was the right thing to do. Greek citizens deserve a say on one of the most important matters in their lifetimes. Perhaps more important, the move could finally force Europe into the full reckoning required to solve its two-year-old sovereign- debt crisis.
Far Short
Europe’s latest bailout proposal falls far short of what’s needed. Under the deal, private banks holding Greek debt would voluntarily accept a 50 percent write-off on their returns; the European Financial Stability Facility, the EU’s bailout fund, would be leveraged to 1 trillion euros ($1.37 trillion) from 400 billion euros; and European banks would raise 106 billion euros ($145 billion) in new capital by June 2012. As for Greece, it is due to receive 130 billion euros ($180 billion) in public funds on top of 110 billion euros pledged in 2010.
As we have previously pointed out, writedowns of Greece’s sovereign debt should be much steeper. Greek bonds held by the European Central Bank would not be covered, so the writedown is really less than 50 percent. It needs to be closer to 70 percent to make Greece’s debt burden bearable. In addition, the EFSF needs a war chest of at least 3 trillion euros to make sure Europe’s banks are recapitalized and to guarantee the financing needs of Italy and other struggling governments.
Greeks know that this latest bailout proposal will also come with many unpopular strings attached, including further austerity measures. In an Oct. 27 poll for the Greek weekly To Vima, the majority said the deal should be put to a national vote, with 58 percent calling it “negative” or “probably negative.” Deep budget cuts, broken pension promises and heavy government job losses have already led to strikes, street protests and violence.
Papandreou hopes to use the referendum both to improve the terms of the bailout and to win buy-in from voters. To do this, he won’t make the referendum just a question of continued austerity. Instead, he will probably turn it into a vote on Greece’s euro-area membership. In the To Vima poll, 7 in 10 Greeks said they want to keep the euro. In a referendum framed as “stay with the euro, or return to the drachma as an orphan state,” Greeks may very well choose the euro.
The referendum is unpopular with European leaders, but it increases Papandreou’s leverage in negotiations, especially with the Germans. If they don’t offer Greece better bailout terms, the entire EU project could collapse, bringing down the European economy with it. The Greek leader has cunningly avoided naming a date for the referendum, saying only that it would take place after the details of the bailout have been nailed down. He is inviting European leaders to sweeten the pot.
Confidence Vote
Papandreou is also wagering he’ll win the confidence vote, even though he had a difficult time last month passing the austerity measures required to make the latest bailout plan possible. The popularity of his party, the Panhellenic Socialist Movement (Pasok), is in decline. If it spurns him, an early election would be called, and Pasok would probably lose. That leaves his party in the position of having to support him on the confidence vote, or risk losing control of parliament.
If Greek voters support the referendum, Papandreou will win the mandate he needs to continue with austerity measures and thwart the opposition. It could also quiet street protests, and even bring a modicum of political stability to Greece. That would help calm markets and boost confidence throughout Europe.
As Papandreou said in calling the referendum, “Democracy is alive and well, and Greeks are being called to rise to a national duty beyond the regular electoral processes.” Here’s hoping they do.
To contact the Bloomberg View editorial board: view@bloomberg.net.
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