Greece’s referendum: The Great ‘Greek Out’
November 3, 2011 5 Comments
You could be forgiven for wondering if Greek prime minister George Papandreou has fully lost it. Late Monday night, he announced that he would hold a referendum on the second bailout package that had been painstakingly agreed for Greece less than a week prior. The announcement took European leaders, the European Commission and key members of the ruling Pasok government (such as finance minister Evangelos Venizelos) by complete and utter surprise. Markets reacted with panic, pushing Italian ten-year government bond yields to record highs and forcing EFSF officials to delay a bond issue for fear of lack of investor demand. If there is a Greek referendum, it could change the choreography but not the ultimate endgame for Greece: an exit from the eurozone. This change in choreography could make the difference between life and death for the euro, however.
Calling a referendum is a purely political ploy by Mr Papandreou. He has faced significant opposition from the public, from the opposition parties and from within his own party as he has attempted to implement the terms of the bailout. A referendum on the second Greek bailout package will force Greek citizens and politicians to either fall in line behind Mr Papandreou in implementing the terms of the bailout, or risk an immediate default and exit from the eurozone.
It is still uncertain whether the referendum will actually take place. Two major hurdles must be cleared before the referendum is held on December 4th. First, the government needs to survive that long, which is currently looking unlikely as Pasok MPs resign and threaten the party’s parliamentary majority. Furthermore, there will be a vote of confidence on Friday, and it is unclear whether Mr Papandreou will win it. Second, the referendum must be passed in parliament. While the cabinet approved the referendum on Tuesday evening following 7 hours of deliberation, a number of Pasok MPs continue to oppose the move, including finance minister Venizelos. The opposition parties in parliament will vote against the referendum in parliament, so if a few of the Pasok MPs break rank, then the referendum will be defeated.
If Mr Papandreou manages to pass these two hurdles, it is still unclear what the result of the referendum might be. First, the actual issue being voted on must be identified. Mr Papandreou originally said the referendum would be on the second Greek bailout package, but more recently there have been calls for the vote to be on Greek eurozone membership. Either way, it is most likely the vote will be framed so that it is considered an issue of national importance rather than a fiscal issue. The distinction is important because the Greek constitution stipulates different rules for passing different types of votes, with the former requiring an absolute majority and the latter requiring a super majority (180 votes out of 300) to pass.
No matter how the vote is classified, at least 40% of the population must participate in the referendum for its result to be binding. The main opposition parties would very likely attempt to undermine the referendum by urging their supporters to boycott the ballot. Pasok supporters may also stay home on referendum day as a way to register their protest against Mr Papandreou’s political maneuverings.
If enough Greeks participate in the referendum to make the result binding, it is difficult to know what the result will be. In a recent opinion poll, nearly 60% of Greeks were opposed to the second Greek bailout package. However, according to a different poll, just over 70% of Greeks are in favour of eurozone membership. If the referendum goes ahead, its phrasing will be monumental in determining its outcome. If Greeks vote to reject the second bailout package, Greece will not get the sixth tranche of bailout funding and will undergo a disorderly default in December when around €8bn in debt must be rolled over. This would very likely be followed by a managed exit from the eurozone, with the troika and other eurozone member states providing some bridge financing for Greece to minimize contagion.
If Greeks vote in favour of the second bailout package and the next tranche of bailout funding is transferred, a disorderly default will be avoided for now. A default cannot be avoided for long, however. The current bailout programme envisions Greece regaining competitiveness by undergoing a long and painful internal devaluation. This process is unsustainable and will not be tolerated by Greeks for the next decade. I expect Greece will instead default on its debt and leave the eurozone by 2013 in as managed and orderly a way possible. In doing so Greece can reissue the drachma, allow it to depreciate drastically, regain competitiveness almost overnight and find economic growth much more quickly.
Ultimately, the endgame for Greece is the same regardless of what happens with the referendum. However, Greece undergoing a disorderly default and eurozone exit now vs a more managed default and eurozone exit later makes a significant difference for the rest of the euro area. With no firewall in place to protect European banks in the event of a Greek default, a disorderly Greek default now would immediately spark of a financial crisis in the eurozone and contagion to the rest of the eurozone would be significant. For Greece the question is default and pain now, or default and pain later. For the eurozone, it could make the difference between disintegration or survival.
Note: There’s an emergency cabinet meeting at 10am GMT today (November 3rd). It seems very likely a coalition of national unity will be agreed or an early election will be called. I will post an update if necessary following the meeting.