Greece Rocks the Boat – Again

A simple “thank you” would have been enough.

All things considered, it was the least the Greeks could do.

Since 2010, the EU has provided Greece with $150 billion in bailout funds to keep their government operating.

And now, in the just completed framework discussions on the EU sovereign debt crisis, the Greeks were approved for another $180 billion in EU funds to tide them over in 2012, as well as the prospect of having 50% of their debt to private bondholders essentially forgiven, without apparently, triggering a credit default.

Not bad for a country where the government consumes nearly fifty cents of every dollar in GDP, and which promoted policies that famously allowed certain citizens to retire at age 53 with 80 percent of salary.

But it was not to be.

As the Germans and French frantically attempt to keep the EU bailout deal from unraveling under the weight of its own contradictions, the Greeks yesterday stunned the EU, and further jeopardized the the continent’s financial stability – not to mention global markets –  by calling for a national referendum on the EU’s bailout plan.

In a speech yesterday, Greek Prime Minister George Papandreou called for a national referendum in January to either approve or reject the EU bailout deal, and the austerity program required by the EU for Greek eligibility.

Papandreou’s announcement came at at time when the bloom is clearly off the rose on the once-reassuring EU bailout package.  The Economist summed it up best:

“Now they (EU Leaders) are keen to tap into resources that are not their own to fund this crazy scheme of guarantees, leveraged off guarantees, to sell bonds and bank shares that no one may want to buy, (in order) to restore value in the banking system destroyed by other bonds that no one wants to own right now. This is a construct of Madoffian proportions.”

On top of the critical assessment of the bailout package is troubling news about EU unemployment.

EU-wide, unemployment spiked to 10.2 percent in September; the highest it has been since records of the Euro area began in 1998.

The unemployment news is even worse for individual countries, with an odious economic divide separating EU countries.  Unemployment in Germany Austria and the Netherlands is under 6 percent. However, in struggling countries on the periphery of the EU, unemployment is staggering:  14 percent in Ireland, 18 percent in Greece and nearly 23 percent in Spain.

Unemployment on this scale will impact GDP growth figures for the EU as a whole, with QIII numbers out in mid-November. With GDP growth as the single biggest driver necessary to meet budget targets and restore fiscal discipline, any reduction in growth, or negative growth, will vastly complicate the terms of the EU bailout.

A sign of that came Monday as yields on 10 year Italian sovereign debt spiked to 6.1 percent on concerns that Italy will not be able to implement the aggressive austerity program outlined at the EU summit last week. By way of comparison, the German 10 year note has a much more solid yield of 2.1 percent.

With this as backdrop, the Greek announcement of a referendum prompts several immediate, practical considerations.

First, can/will the EU disburse monies approved for Greece if the underlying agreement is subject to a referendum? If not, what happens to Greece and the holders of its debt?  How big is the cascade?

How can the EU proceed with negotiations with private sector financial institutions on the terms of an overall reduction in Greek debt if the final deal is subject to the referendum?  Will banks simply walk away until there is greater clarity and assurance?

How can the EU hope to attract any capital from sovereign wealth funds or countries operating through the IMF with 90 days of Greek inspired uncertainty hanging over the continent, where economic conditions are fluid and deteriorating, while politics are deadlocked.

Perhaps more ominously, now that Greece has set the precedent for popular approval of the EU bailout, what is to stop other at risk nations from demanding the same?

And, at least in theory, that does not apply solely to the benefactors of EU largess but also to the financiers.

Consider that Slovakia barely approved the original (and now inadequate) terms of the July Greek bailout, rooted in concerns that it was unfair for a poor country that had taken strong austerity measures to reset its economy to have to pay for those that have not.  In Germany, Angela Merkel was able to get the the original bailout fund approved with only five votes to spare from her coalition.

Discontent among those providing the bailout is as deep as among those forced to accept austerity to receive it, raising legitimate concerns about the very viability of the currency union as it is currently composed.

In short, Papandreou’s decision was a terrible mistake that threatens not only to quickly unwind the EU bailout deal, but to rapidly undermine the EU economy as a whole.

In a single statement, Papandreou demolished months of careful planning and difficult compromise that resulted in the EU bailout proposal, as inadequate as it was, leaving the EU trying to cope with no clear direction amid horrendous economic indicators.

That does not even contemplate a possible Greek rejection of the bailout.

The only feasible way out is for Greece to recind the referendum, which would solve the immediate problem.

But the instability that the referendum idea will have caused in Greek domestic governance and the EU as a whole, is likely to have ripples and echoes not fully understood or  easily contained.