Thursday, November 3, 2011

Will Papandreou's Gamble Pay Off?

It seems like my last comment on Greece holding the world hostage irked some of my readers. One of them emailed me, accusing me of being an "anti-American, anti-German, leftist Greek apologist" who is discrediting himself by using terms like "banksters." Nothing can be further from the truth, but let me be clear on something, I loathe arrogant banksters and know they will eventually get what's owed to them.

As far as Papandreou's gamble, a friend of mine asked me what I thought, and told him straight out: "It's a stroke of genius and insanity, but he's basically playing high stakes poker with his European counterparts because he knows Greece is screwed either way, so if they go down, let them cut the best possible deal, much better than a 50% haircut. Having said this, doubt we'll see a Greek referendum."

Opinions are divided on Papandreou's gamble. Aristides N. Hatzis, an associate professor of law and economics at the University of Athens, and founder of the Greek Crisis blog, wrote an op-ed in the NYT, stating it will wreak havoc in Greece and could destroy the eurozone:
...even if Papandreou manages to survive and put together a referendum (highly unlikely), there is a great chance that the Greek people will vote against the European plan for a simple reason: Where everybody in Europe sees a 50 percent haircut, Greeks see more austerity.

At this point an imminent collapse of the Greek government would bring chaos, which could lead to a disorderly default and thus the financial (and political?) collapse of Greece -- not only because the euro membership has been thrown into jeopardy, but also because a lot of people are determined to bring on the catastrophe and very few are stepping up to make sacrifices to prevent it.

Of course Papandreou’s gamble stunned Europe and the markets. The whole situation threw into question the effort to contain the euro zone’s sovereign debt crisis. Even before the bombshell, the markets were quite skeptical of the euro rescue plan. The euphoria after European leaders announced it lasted only a split second; doubts started to grow from the very beginning. The European Central Bank's president, Jean-Claude Trichet, called for a “swift implementation” if financial stability is to be restored. But now the Continent's leaders would have to wait for an elusive referendum in Greece. Will they?

In his op-ed comment for ekathimerini, Alexis Papachelas writes, Stepping back from the abyss:

I will try to be clear and fair. What Prime Minister George Papandreou did on Monday was dangerous and irresponsible. With a reckless move, he put the country at risk of a disorderly default that would bear his own stamp.

Contrary to what he did in June, when he offered to step down for the sake of the common good, Monday Papandreou elevated his personal ambitions above the national interest causing serious damage to the country’s credibility. PASOK’s old guard and a good dose of victimization to dubious interests sent him into panic.

At the same time, we must criticize the blatant hypocrisy and irresponsibility of Greece’s opposition parties, media and pundits. The same people who have been demanding direct democracy were all of a sudden angry at the prospect of a referendum. The same people who were slamming outside supervision and interference were now expressing their concern about the reaction from Brussels officials. The same people who were certain that Greece would never be kicked out of the eurozone, were now shaking. The same people who proposed unreservedly the haircut later said it was a disaster but yesterday were afraid that it may not happen at all.

We give the impression of being a country that with glee and self-destructive zeal has climbed onto the international stage and is threatening to commit suicide. On Monday, a prime minister who panicked took center stage. He took the gun from others’ hands and made Beijing, Washington, Berlin and everybody else wonder what is going on in this country and with Papandreou.

Meanwhile, ordinary people are losing their minds. They can’t make ends meet and they are starting to wonder what the difference is between a slow, torturous death in the euro and the sudden death of the drachma. None of us has the answers and we are all responsible for the fate of this country, which our parents and grandparents handed over in a much better state than the one we will pass on to our children.

Against the odds, I try to be optimistic. The only hope is that Papandreou’s irresponsible and juvenile action will make us all come to our senses, to step back from the edge of the abyss and find a solution that will satisfy the public but which will be based on realism and truth.

But did Papandreou really put his personal ambitions above national interests? I don't think so and will go over why citing four separate commentaries. First, Peter Morici thinks the referendum is the right thing to do:

Ultimately, Greece must generate a large trade surplus -- export considerably more than it imports -- to repay its debts, because much so much is held by foreign banks and international agencies like the European Central Bank and IMF. With the euro overvalued for its economy, it can't accomplish that surplus without enduring decades of high unemployment to drive down wages and living standards -- likely by 50% or more to make Greek exports adequately competitive.

If Athens can't pay, private creditors and international agencies can't repossess the Parthenon. In the end, Greek private creditors will be compelled to take additional losses beyond the 50% haircut imposed on them now, and the ECB and IMF will take losses too.

This is simply too draconian compared to the other way out -- readopting the drachma, remarking sovereign and private debt to the reinstituted national currency, and letting the value of the drachma fall to levels consistent with a trade surplus that permits Greece to service its debts.

As denominated in euro, foreign creditors would receive payments on Greek debt less than they are currently owed. However, with the Greek economy more fully employed and generating exports, the haircut a reinstituted drachma would impose would be far less than will ultimately occur though the mindless austerity now imposed.

In the bargain, Greece would not be pulverized into decades of punishing depression.

In his op-ed comment in the FT, Yale professor Stathis Kalyvas opines that Papandreou will fall but he is right to take this gamble:

Faced with yet another difficult vote over the new debt deal and with mounting popular protests against austerity measures, Mr Papandreou was left with three options. The first was slow death: persist on his current path of political paralysis, dwindling popularity, and collapsing governing capacity. The second was immediate death: call for early elections that, all surveys indicate, would have resulted in an unprecedented rout for his party. The third was gambling for resurrection: call for a referendum that would give his government a new lease on life and salvage his political career. Seen from this perspective, his decision does make political sense.

Most analysts translate his unpopularity into a referendum defeat. They also point to public opinion surveys showing that a large majority of Greek public opinion is opposed to austerity measures. By now, everyone is aware of the protests and riots that have become a near daily occurrence in Athens. But a defeat is far from warranted. Faced with a starkly worded choice of austerity within the euro versus bankruptcy outside of it, a majority of the Greek electorate may well turn out to support the debt deal. Such a victory could amount to an infusion of political legitimacy for Mr Papandreou. His decision may be a gamble, but it is not politically senseless.

And yet, it is not a sensible decision either. For one thing, his gamble has resulted in mounting turmoil in his own party. A backbencher revolt could put an end to the Socialist Party’s already thin parliamentary majority, leading to early elections and rendering the referendum a moot issue. Even if the government survives this vote of confidence, it is unclear how it will be able to govern until the referendum takes place, given the combined effects of economic uncertainty and political instability. It is also very hard to imagine that the eurozone governments will accept paralysis until the Greek government gets its act together. Finally, even if the referendum takes place and the debt deal is approved, it is hard to see how Mr Papandreou will implement a reform programme he has refused to, until now.

In gambling for his own resurrection, he will fail to achieve the political survival he is seeking. It is possible, however, that his sacrifice will break the present political paralysis in Greece, eventually leading to the kind of catharsis that Greeks are yearning for. After all, there was always a problem with the idea that Greece would be taken out of the mess by the same politicians who led the country into it. If this turns out to be the case, Mr Papandreou’s gamble could well prove to be the kind of shock that resurrects Greece’s efforts to set itself on a different path and jolts the eurozone into a more vigorous effort to formulate a comprehensive solution to a crisis it has failed to rein in so far.

I completely agree, it's high time the eurozone's leaders come up with a more comprehensive solution to this crisis, which is exactly what George Soros and others have been calling for. This is a point Andreas Koutras underscores in his latest comment, Europe's strongest link is Greece:

There is no question that most European politicians were surprised by Mr. Papandreou referendum decision. With one stroke the Greek PM brought back the Greek problem at the forefront, but this time in the context of democracy in Europe. It is not a secret that the EU along with money deficits has also a huge democratic deficit. The only elected body, the Euro-Parliament has little influence over events. One wonders why Europeans still accept the cost of these impotent parliamentarians. The commission is appointed and not elected while the European council is dominated by Germany and France which effectively take decisions for the other countries. The so called President of Europe Mr. Van Rompuy was voted by 27 out of the 400million eligible voters. Sarkozy muttered that much recently, when he questioned the wisdom of deciding the fate of Greece. If Europe is to have a future then EU politicians should start addressing some of these issues seriously. Sweeping under the carpet is an option that is fast disappearing.

Finally, Larry Eliott, economics editor at the Guardian, opines that Papandreou's gamble could pay off:

On the face of it, the decision by the Greek prime minister, George Papandreou, to hold a referendum on the latest bailout package looks like an act of political hari kari. Certainly that was the kneejerk response of the markets, which sold off heavily overnight and continued tumbling in Europe this morning. No question, the announcement of the plebiscite has put an end to last week's rally in response to the emergency measures announced at the Brussels summit.

The next couple of months until the referendum is held will be a white-knuckle ride as investors contemplate what would happen if the Greeks say no. What worries the markets is that Papandreou's gamble backfires, the referendum is lost, the European Union and the IMF refuse to stump up any more money, Greece runs out of money, Greek banks go bust, the country defaults in a disorderly way and leaves the single currency, and a domino effect is triggered in other countries such as Spain and Italy.

But will this actually happen? Perhaps not. For a start, Papandreou may win the referendum. Polls in Greece have shown that 60% of the population are against the terms of the bailout but 70% are against leaving monetary union. If the vote is framed as "do you want to stay in the single currency or not" (which it will be if Papandreou has any sense) there is every chance the Greeks may agree to swallow another dose of austerity, however unlikely that looks at present. Voters tend to be quite conservative: they tend to prefer the status quo, which in this case would be remaining inside the single currency rather than taking the leap in the dark represented by default and exit.

The second thing in Papandreou's favour is that if Europe is a problem for Greece then Greece is actually an even bigger problem for Europe. If ever there was a case of "when you owe the bank €1000 you have a problem but when you owe €100bn the bank has a problem" then this is it. The question for Greece's partners in the single currency and for the International Monetary Fund is whether they want to push the Greeks so hard that they vote no to the deal, or whether they are prepared to soften the terms in order to safeguard against a disorderly default and all that implies.

My hunch is that even if the Greeks vote no then it will still get enough money to prevent it defaulting because the stakes for the rest of Europe are so high. Europe does not have a Plan B in the event of a Greek default. Let's be honest, it still doesn't have a fully worked out Plan A. It needs time to get its act together (assuming that it is actually possible) and will probably be prepared to buy time by making life easier for the Greeks. Papandreou is in a stronger position than people think.

Papandreou is in a much stronger position than people think and he wants Greeks to vote on December 4 on whether their country should stay in the eurozone. What happens in the next few days and weeks is anyone's guess but I wouldn't be surprised if Papandreou's gamble pays off. The question is at what cost for Greeks who have already suffered enough.

Breaking morning news: Facing a major revolt from his own party, Greek Prime Minister George Papandreou is expected to offer his resignation, sources in Athens have told the BBC. But Greek state television refutes this, stating that Papandreou will not resign. Meanwhile, ekathimerini reports that Greek conservative opposition leader has called for an interim government that will guide the country through a national election. However, ERT reports that a unity government will have to wait till after the referendum.

Midday update: CNBC reports that stocks bounced again in volatile trading Thursday following a report that the Greek prime minister said he has thrown out his plan to hold a referendum on the latest European debt deal for Greece. Ekathimerini reports that talks are expected to take place between government representatives and New Democracy officials on Thursday afternoon with a view to form a transition government after the ruling PASOK party reacted negatively to Prime Minister George Papandreou’s bid to hold a referendum on whether Greece should remain in the euro. Government spokesman Ilias Mosialos confirmed Papandreou was not stepping down and had withdrawn his bid for a referendum and that, as things stand, the confidence vote he called for would still take place in Parliament tomorrow. Those of you who speak Greek, can watch deliberations at the Parliament live on MEGA television.

Afternoon update: Greek Finance Minister Evangelos Venizelos said the nation won't hold a referendum. He was speaking to party lawmakers in Parliament in Athens today. Andrea Catherwood and David Tweed report on Bloomberg Television's "Last Word" (video below). Venizelos also warned against holding early elections saying it would put Greece’s bailout deal in jeopardy.

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