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Greek vote call risks Europe crisis plans
ATHENS — Europe’s days-old plan to solve its crippling debt crisis and restore faith in the global economy has been thrown into chaos by the Greek prime minister’s stunning decision to call a referendum on the country’s latest rescue package.
A ‘no’ vote could cause a devastating disorderly debt default in Athens that would cause bank failures across Europe, new recessions in the developed world and see Greece leave the common euro union. A top European official warned that if Athens were to go ahead with the referendum, it might not get the bailout funds it needs to avoid bankruptcy in two weeks.
The reaction in the markets was brutal, particularly in Europe, with the Athens exchange down a massive 6.8 percent on worries the turmoil could bring down the government.
“While it may be the democratic thing to do … what happen if Greece votes ‘no’, which is possible given how unpopular the bailout plan appears to be amongst Greece’s voters?” said Michael Hewson, analyst at CMC Markets. “The resulting fallout could well result in a complete meltdown of the European banking system and throw Europe into turmoil.”
Months of uncertainty over the vote, which would be held early next year, would threaten the stability of larger economies like Italy, which are too expensive to rescue. As the country’s borrowing rates soared Tuesday, Premier Silvio Berlusconi held emergency talks with his key economic ministers.
The turmoil will also hinder European leaders’ efforts to implement their anti-crisis measures, such as getting countries like China to contribute to their expanded bailout fund and convincing banks to accept bigger losses on their holdings of Greek debt.
German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed to hold emergency talks on Greece with the EU, the IMF and eurozone leaders on Wednesday. A separate meeting with the Greek government is also planned ahead of the Thursday summit of leaders from the G-20 economic powers in Cannes, France.
“Germany and France jointly with their European partners are determined to guarantee the full and swift implementation of the summit’s decisions, which are more necessary today than ever,” a statement from Merkel’s office said.
Juncker told RTL radio in Luxembourg that the vote proposal changes the conditions of that deal, according to his spokesman Guy Schuller. Athens runs out of money to pay pensions and salaries by mid-November and faces bond redemptions in December.
Greek Premier George Papandreou shocked investors, as well as his own citizens, party lawmakers and partners in the eurozone, by announcing late Monday that a plebiscite will be held in what he called “a supreme act of democracy and of patriotism for the people to make their own decision.”
A confidence vote in the Socialist government will take place at the end of this week but it is unclear whether the Socialist government will win it. Papandreou saw his parliamentary majority cut to 2 seats Tuesday after one lawmaker quit the ruling party, while another two called for him to resign. At least five other Socialist lawmakers last month called for the formation of a cross-party, national unity government.
Given that Greece is heading for its fourth year of recession next year, investors believe Papandreou may lose the referendum vote if it ever takes place. A victory in the referendum, on the other hand, could give the Greek government a solid mandate to pursue its austerity measures required in exchange for the bailout loans.
A recent opinion poll suggested that 60 percent of Greeks were against the austerity measures that have been required in return for crucial bailout loans. However, other polls show broad support for remaining in the eurozone.
By Tom Fitton
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