Wed Nov 2nd, 2011 at 08:55:25 AM EST
As the Greek Prime Minister is already in Cannes to meet with the G20 leaders and "discuss" the prospect of a referendum on the rescue package, I'll try to outline some possible outcomes originating from Papandreou's decision, and hopefully start a discussion on the dynamic of the current situation as a whole...
Let me start with four presuppositions:
- I still believe that Papandreou's game is aimed internally at Greece and that he will fold tonight under G20 pressure (basically Merkozy)
- The worldwide explosion that the possibility of referring austerity to be judged by its victims caused, a basic process of democratic legitimization, shows that the Greek government either purposefully or through its incompetence failed to protect its population both during the spring of 2010 and the summer of 2011, from at least the more outrageous of the troika's demands, although it could have. Greece was then even more so the most powerful country in the world. A 2010 threat to pass acceptance of the IMF programme through a popular plebiscite, would have seriously and drastically reduced the scope of the shock therapy Greece was put through or eliminated it all together, with very important effects on global austeritarian dominance hence.
- There is no real way that a referendum on the 26/10 deal can be held on January (or any other month for that matter) in Greece. The real threat is the threat of a sustained threat.
- The Greek PM is reacting to increasing social unrest in Greece, and is possibly at this point worrying even for his physical safety, but certainly about the fact that he is right now one of the most despised figures in Greek political history. The referendum idea is the result of a panicked reaction to massive popular pressure. Especially the shock of the massive and ubiquitous protests on the 28th of October national holiday which were literally unprecedented...
So let's examine what the real stakes and strategies are going to be tonight, if only to get a grasp of what is in the cards and what are possible outcomes for the players in this game...
front-paged by afew
Let's start with goals: Sarko and Angela's goals have a lot to do with preserving the European banking system and avoiding a eurozone crash. Papandreou's goals can either be internal (preserving as much as possible of his political present, future and legacy as possible) or external (achieving the best result for whatever he considers as Greek National Interest), or a combination of both.
George A. Papandreou (GAP henceforth) arrives at Cannes and meets the Big Players. What happens then?
Scenario 1. Papandreou persists in his decision to hold a referendum to ratify the new memorandum deal. In this case Sarkozy and Merkel (S&M henceforth) can either:
1a. Say "We respect your sovereign right to do so, we will support you in your 'yes' campaign". In this case GAP goes home happy, but immediately a demand for referenda on the same basis arises in IE, PT, SP, IT with bond spreads reaching astronomical heights and IT and SP becoming EFSF material (this would be what would happen if GAP never mentioned anything about a referendum, at a slightly slower pace). Italy is already too big, the 26.10.11 deal, can't accommodate it, the Greek referendum has no object any more, and as French spreads lift off the eurozone is doomed. Papandreou lives to fight another day, slightly empowered, yet with the same economic and social mess he is governing getting worse. He might possibly survive the defeat - but it is doubtful. Anyway the collapse of the rescue package will make developments in Greece secondary and certainly not centered around any referendum.
1b. S&M tell GAP that if he insists on a referendum there is no "rescue pact", the deal is off, Greece receives no money until a new deal is discussed and he can either back off or not have anything to refer to a referendum. This is what the market expects today as its indices show, and that's the official line it seems. This is important because if government sources are to be trusted the Greek government has liquidity right now for up to the 20th of November or something, so that there might be a cessation of internal payments at the end of the month. Mid-December there are 4 billion euros in debt, maturing.
To this Papandreou can either:
1b-i: Fold. In which case the markets will be temporarily happy but I can't imagine how he can return to Greece and continue to govern. The political crisis in Greece will renew fears about its ability to persist on the path to self-destruction that the "rescue package" entails. This will also be an indirect admission of sovereignty loss. So after a brief respite we will be where we were a few days ago but with GAP's government collapsing immediately. With all the effects that will have on the bond markets and the "rescue packages"...
1b-ii: Bargain: Insist on some minor modification or some sort of investment deal, anything that he can return to Greece with in triumph. He will be needing something to spin back at home, and pretty much even the slightest departure from the current plan will be used by his government and the MSM that support him in quasi-soviet near-unanimity, as proof of his great tactical talents or something. This will not work, but might mitigate the government's disaster and give it a lease of life for couple of months. With 17,5% unemployment at last count, falling wages and PASOK around 14% in the polls, it will have to be a pretty darn impressive modification to even raise an eyebrow. So we're back to political instability in Greece and elections. In all Greek election scenarios note that the pre-election period lasts about a month. In this month one can assume that markets will be jittery at least - and by then Italy at least might have exploded fiscally all by itself...
1b-iii: Defy: Papandreou could call the bluff and insist that he cannot accept any deal without popular legitimization. This would be lovely IMHO but unless he is certain that S&M will back down, since Greece must also be in a position to act on a possible immediate default, he can't do it: there are absolutely no preparations for such an event on the ground. If S&M back down we're back to 1a. If they don't, Greece defaults immediately and hard and the Eurozone quite possibly unravels taking its banking system down the hole with it. IMHO S&M cannot let Greece default hard right now, but GAP, I remind you intends to support the "rescue package" deal in the referendum. He will not, I think, push this too far.
Scenario 2: Papandreou goes to Cannes to bargain. This leads to 1b-ii but from a weaker initial position for Greece.
Scenario 3: Papandreou goes to Cannes to explain himself and change the subject. An anodyne formulation of the referendum question will be accepted and no one loses face immediately. This too is a likely scenario and IMHO what GAP was aiming for to begin with. In this case markets can be happy until the next crisis, or the next bout of riots in Greece or the next tax revolt, and Papandreou can pretend he stayed firm and try to milk this for all the political credit he can get. Whether anyone will show up for some unsignificant referendum is another matter. It will do nothing to address the rage on the Greek streets though. I remind everyone that the November 17th commemoration is coming up, in honor of the Polytechnic school's student uprising against the military junta in 1973, an event that has inspired and has been part of the new set of anti-government slogans for half a year now. Street fights and havoc occured even in non-emergency years. This year, it look like it is going to be very intense...
I note that the referendum question is rumored to be some variation of "yes of no to the euro". Which even if it is a close race (possible), never mind if polls show that the no vote will prevail, sets fire to the eurozone and bond markets as much as an actual vote.
Scenario 4. Papandreou goes there to submit and folds. This is scenario 1b-i, but even worse for GAP.
Scenario 5. The issue is left unresolved. This will induce sudden death for Italy, almost certainly.
Thus: an unstable and weak rescue package might be under all scenarios pushed to a quicker death. There is no meaningful referendum that can be held, either because there can't be anything to vote on if the deal is put on hold, either because events in Italy and Spain will make it obsolete before it is finalized enough to be put to a vote, either because the wording of the referendum will make it irrelevant, either because the Greek government falls before the referendum is decided in parliament. However the prospect of Greece rejecting the "rescue package" once out of the bottle, cannot be put back. Strong pressure for referenda in other peripheral countries might possibly arise. There will be political instability in Greece and huge uncertainty that is going to stoke the fires of the markets and destroy a decrepit deal. So events have been accelerated. Let's see how it all plays out.
So that's my take on things, just a few thoughts and an outline of what might be coming up... it might be interesting to explore possible outcomes in the discussion.