By James G. Neuger and Simon Kennedy - Nov 3, 2011 7:59 AM GMT+0700
European leaders for the first time raised the prospect of the euro area splintering, choosing to treat Greece’s December referendum on the terms of a bailout package as an in-or-out vote on the debt-stricken nation’s future in the currency union.
Led by Germany and France, Europe’s economic and political anchors, the euro’s guardians yesterday cut off financial aid for Greece until a vote they said would be on Dec. 4 or Dec. 5 determines whether it deserves a fresh batch of loans needed to stave off default.
“The referendum will revolve around nothing less than the question: does Greece want to stay in the euro, yes or no?” German Chancellor Angela Merkel told reporters after crisis talks hours before a Group of 20 summit set to begin today in Cannes, France. French President Nicolas Sarkozy said Prime Minister George Papandreou’s government won’t get a “single cent” of assistance if voters reject the plan.
The hardball tactics open the door for a nation to leave the currency bloc that at its setup in 1999 capped Europe’s progression from war to prosperity and was declared “irrevocable” by its founding fathers. Polls show most Greeks object to the austerity required for aid, yet more than seven in 10 favor remaining in the euro, a survey last week of 1,009 people published in To Vima newspaper showed.
Papandreou triggered the unprecedented confrontation with this week’s unexpected, unilateral decision to hold a poll on the additional budget cuts demanded as conditions for a second aid package.
The Nov. 1 announcement, which was designed to force the Greek opposition to back the fiscal cuts, sent Europe’s stocks, currency and bonds tumbling. It came less than a week after leaders worked through the night in Brussels to establish a new plan to help Greece pay its bills, ring-fence Italy and recapitalize banks.
Until the ballot, an already delayed aid instalment of 8 billion euros ($11 billion) will remain on hold, Merkel and Sarkozy said in a late-night appearance in an auditorium better known as the home of the Cannes film festival.
Papandreou, summoned to the French resort with his hold on power weakening at home and subject to a confidence vote tomorrow, defended his decision. Greece “needs a wider consensus” for the bailout demands and will choose to stay in the euro, he told reporters at a separate briefing.
‘Not the Moment’
The Greek premier declined to say how the referendum will be worded, saying it “is not the moment” to give the exact language, only that “the question is not just about a program, but do we want to be in the eurozone.”
EU treaties make no provision for a country to exit the currency, and the European Central Bank’s legal department said in December 2009 that an expulsion “would be so challenging, conceptually, legally and practically, that its likelihood is close to zero.”
A decade since Greece fudged fiscal data to win entry to the euro and two years after it triggered the crisis by revising its budget numbers, successive rounds of tax increases and cuts to wages and pensions have deepened a recession now in its fourth year. The economy will contract 5.5 percent this year and 2.5 percent next, according to its 2012 budget. Unemployment reached 16.5 percent in July.
“The reality is the eurozone is telling Greece look, either you’re in or you’re out,” said Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics in Washington. “Beggars can’t be choosers and you’re going to have to make a decision.”
Regaining Control
While leaving the euro would allow Greece to regain control of exchange and interest rates, a September report by economists at UBS AG said its new currency would drop 60 percent, and local borrowing costs would jump at least 7 percentage points, imperiling the balance sheets of banks and companies.
Departure from the European Union would cause trade to fall by half even with devaluation. The cost would be as much as 11,500 euros a person in the first year outside the euro and 4,000 euros in following years, according to UBS.
Merkel and Sarkozy also pledged to step up work to prevent Greece’s travails, now exacerbated by a month-long political campaign, from spilling over to the rest of the 17-country euro area.
Finance ministers will accelerate plans to boost the firepower of the 440 billion-euro rescue fund, the two said. On Oct. 27 euro leaders agreed to use leverage to get the fund’s clout up to 1 trillion euros and told banks to raise 106 billion euros by the end of June to fortify their capital.
‘We Are Steeled’
“We are steeled,” Merkel said. The EU decisions aimed at bolstering the euro “have to be carried out more quickly. We must have clarity more quickly. Then we will be in a position to have an appropriate response that’s good for the euro, regardless of how the Greek referendum turns out.”
German banks held $12.4 billion in Greek government bonds on June 30, according to the Bank for International Settlements. That excludes 7.2 billion euros in Greek government bonds held by FMS Wertmanagement GmbH, the “bad bank” of Germany’s nationalized Hypo Real Estate Holding AG.
French banks lead the group of Greek creditors among foreign banks with overall claims of $55.8 billion, including $10.7 billion in sovereign debt, according to the BIS. The overall figure for French banks is inflated by $43.5 billion in lending to companies and households, mainly because of Credit Agricole SA’s Greek division, Emporiki Bank SA.
G-20 Overshadowed
The latest chapter of the euro crisis will today overshadow the G-20 summit, which is being promoted with signs declaring “history is being written in Cannes.” European governments had planned to use it as a showcase for a revamped crisis-fighting strategy and to seek foreign donations to implement it.
In a sign such hopes will be dashed as the turmoil mounts, Chinese Vice Finance Minister Zhu Guangyao said yesterday it’s now “too soon” for his country, holder of the world’s largest currency reserves, to contribute.
The G-20 meeting will open officially with a lunch-time discussion on Greece and the euro-area after the leaders of France, Germany, Italy and Spain hold another round of talks in the morning.
As the heads of government meet, ECB President Mario Draghi will be chairing a meeting of the bank’s Governing Council for the first time. He does so under pressure from investors to boost the bank’s bond-buying and cut interest rates to protect Italy from succumbing to the largest debt burden after Greece and support a slowing euro-area economy.
Berlusconi Measures
Struggling to prove his nation is credit-worthy, Italian Prime Minister Silvio Berlusconi last night convened his Cabinet which agreed to include emergency measures in a budget bill the country’s parliament must pass by Nov. 15. Steps include raising the retirement age, easing rules on firing workers and accelerating state asset sales.
The aim is to make the euro-area’s third largest economy more flexible to placate investors who have propelled its 10- year borrowing costs to euro-era highs above 6 percent --triple Germany’s -- even with the ECB buying its bonds.
Europe’s woes return the G-20 to the crisis footing it adopted in 2008 and 2009 when governments united to tackle the collapse of Lehman Brothers Holdings Inc. and subsequent global recession.
Australian Prime Minister Julia Gillard said yesterday Europe faces questions that “need to be answered and answered quickly,” while Chinese President Hu Jintao said the rot must be “prevented from spreading further.” Federal Reserve Chairman Ben S. Bernanke said in Washington that Europe is weighing on the U.S. recovery by fanning financial market volatility.
“The Cannes summit will likely take us back to the G-20 as crisis manager, but against a backdrop where the unity that had been the hallmark of the G-20 has already begun to fray,” said Daniel Price, who helped organize the 2008 summit for President George W. Bush and is now managing director at Washington-based Rock Creek Global Advisors LLC.
To contact the reporters on this story: Simon Kennedy in Cannes at skennedy4@bloomberg.net; James G. Neuger in Cannes at jneuger@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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