Greek Prime Minister George Papandreou's call for a referendum on the freshly minted bailout package rattled global financial markets as officials and investors panic over the possibility of a collapse of the euro-zone.
After what seemed like a Sisyphean task to hatch a comprehensive plan to deal with the sovereign debt crisis by European leaders, Greece’s shock decision late Monday to hold a referendum threatens to unravel all the goodwill mustered over the past few days.
Essentially, Mr. Papandreou is asking his countrymen to decide if they wish to accept the debt deal that will require Greece to implement all the austerity programmes forced upon it by the “troika” (EU, ECB and IMF) for at least a few years in return for continued funding. But effectively, the referendum amounts to a vote on Greece remaining a member of the euro-zone and could potentially lead to a disorderly default of its debt.
The referendum is not expected to be held before December and current opinion poll suggests 60% of Greeks oppose the deal. Many things can still happen between now and then. Mr. Papandreou is already facing revolt within his own Pasok Party and a confidence vote against him may be in the works. Or perhaps, he can persuade Greeks that their best option remains within the euro-zone.
This brings home the point that when push comes to shove, Greece can still reject the deal, exit the euro and reclaim their sovereignty. While this may not be such a bad option for Greece, coming at such a tense time could fuel concerns about the viability of the entire euro-zone.
In one broad stroke, Greece has lost the goodwill from European leaders and the bailout package is held hostage by Greek voters. The sixth tranche of the aid disbursement to Greece is now in jeopardy while countries such as China and Japan would surely have second thoughts about risking their taxpayers’ money to invest in any bailout fund.
Our recent upgrade of equities was premised on Europe avoiding a messy, disorderly default of Greece. We had that for a few days last week when leaders agreed to a 50% haircut on Greek debt, enlarging the EFSF to EUR1 trillion and forcing banks to recapitalise their core capital ratio to 9%.
With the Greek referendum on the cards, we are back to square one with the tail risk of a disorderly default on the radar again. Worse, this looks like a binary outcome and it is not in the hands of the politicians. Strange, for once, I’d rather it is in the hands of politicians. Now, it is down to a flip of the coin.
There may be some reprieve from the G-20 summit this weekend. But as long as the tail risk remains elevated, we will lighten up at every opportunity.
Is there a silver lining? Yes, but that’s a topic for another time.
After what seemed like a Sisyphean task to hatch a comprehensive plan to deal with the sovereign debt crisis by European leaders, Greece’s shock decision late Monday to hold a referendum threatens to unravel all the goodwill mustered over the past few days.
Essentially, Mr. Papandreou is asking his countrymen to decide if they wish to accept the debt deal that will require Greece to implement all the austerity programmes forced upon it by the “troika” (EU, ECB and IMF) for at least a few years in return for continued funding. But effectively, the referendum amounts to a vote on Greece remaining a member of the euro-zone and could potentially lead to a disorderly default of its debt.
The referendum is not expected to be held before December and current opinion poll suggests 60% of Greeks oppose the deal. Many things can still happen between now and then. Mr. Papandreou is already facing revolt within his own Pasok Party and a confidence vote against him may be in the works. Or perhaps, he can persuade Greeks that their best option remains within the euro-zone.
This brings home the point that when push comes to shove, Greece can still reject the deal, exit the euro and reclaim their sovereignty. While this may not be such a bad option for Greece, coming at such a tense time could fuel concerns about the viability of the entire euro-zone.
In one broad stroke, Greece has lost the goodwill from European leaders and the bailout package is held hostage by Greek voters. The sixth tranche of the aid disbursement to Greece is now in jeopardy while countries such as China and Japan would surely have second thoughts about risking their taxpayers’ money to invest in any bailout fund.
Our recent upgrade of equities was premised on Europe avoiding a messy, disorderly default of Greece. We had that for a few days last week when leaders agreed to a 50% haircut on Greek debt, enlarging the EFSF to EUR1 trillion and forcing banks to recapitalise their core capital ratio to 9%.
With the Greek referendum on the cards, we are back to square one with the tail risk of a disorderly default on the radar again. Worse, this looks like a binary outcome and it is not in the hands of the politicians. Strange, for once, I’d rather it is in the hands of politicians. Now, it is down to a flip of the coin.
There may be some reprieve from the G-20 summit this weekend. But as long as the tail risk remains elevated, we will lighten up at every opportunity.
Is there a silver lining? Yes, but that’s a topic for another time.
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