Posted by: Andy Reinhardt on November 1, 2011
Talk about throwing a spanner in the works. Greek Prime Minister George Papandreou shocked the world by announcing late on Oct. 31 that he intends to hold a popular referendum on the new bailout package hammered out just days ago by European lawmakers. Stock markets swooned Nov. 1, with Italy’s FTSE MIB down nearly 7 percent at one point during the day and the German DAX off 5 percent at its close.
Papandreou’s surprise announcement—which reportedly blindsided European partners such as German Chancellor Angela Merkel and French President Nicolas Sarkozy—set off a flurry of speculation over its motivations and potential impact. The embattled Greek Prime Minister argued that the country’s citizens need to express their consent to the sacrifices required by the bailout deal. “For the new agreement, we must go to a referendum for Greeks to decide,” Papandreou told lawmakers in his socialist Pasok party yesterday. “Democracy is alive and well and Greeks are being called to rise to a national duty beyond the regular electoral processes.”
The political calculus, which the opposition New Democracy party called “reckless,” is that without a parliamentary confidence vote scheduled for Friday, Nov. 4 and a referendum as soon as January, Papandreou’s government can’t withstand the wave of social unrest that has swept Greece in the past 18 months.
Political opponents expressed outrage at the ploy and called instead for national elections to form a new government. Six rebel members of Papandreou’s own Pasok party also called for him to resign, raising the prospect that he could lose his parliamentary majority—and Friday’s confidence vote. With Greek ministers set to meet starting this evening, it’s even possible, says analyst Wolfango Piccoli of global risk consultancy Eurasia Group, that Papandreou’s government “could find itself without a parliamentary majority by the end of today.”
The prospect that this new twist could derail the European bailout package and possibly provoke an uncontrolled Greek default raised alarm bells around the world. Asian stocks were spared the worst damage, down in the range of 2 percent. But the Euro Stoxx 600 index plunged 5.3 percent and the S&P 500 was off 2.8 percent at mid-day in New York.
The most immediate concern to investors was renewed uncertainty in the market. “In addition to constituting a major political gamble, the run-up [to the referendum] will put the European Central Bank, EU, and International Monetary Fund in a tough position regarding disbursements to Greece,” said Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian in an e-mail to Bloomberg News today. El-Erian expressed concern that the European Union’s rescue deal “appears to be unraveling from many sides.” Whether the deal survives through this week’s G-20 meeting in Cannes could be decided a lot sooner than anyone expected.