The Greek Referendum: A Machiavellian Scenario

European politicians and commentators are predictably screaming blue murder over Prime Minister George Papandreou’s announcement that the Greek government will put the EU rescue package to a referendum, but I smell a rat. This looks like a cunning ploy, jointly engineered by Athens and Berlin, to get a more radical “haircut” than the 50 percent announced last Thursday in Brussels … with the French banks footing most of the bill. In this scenario the referendum could be called off (or else the Greek voters induced to say “yes” to the improved deal), and Germany would end up increasing her overall financial and political clout.

On the domestic front Papandreou’s gamble makes sense. “Papandreou’s call for a referendum was a last resort,” according to The New York Times “meant to gain broader political support for the unpopular austerity measures… without forcing early elections.” In  fact it is more than that. The center-right opposition has withheld support from the austerity plan forced upon Papandreou by Brussels, but it has no alternative strategy of its own. He does not want to be the sole villain of the piece, and the debate preceding the referendum would force his opponents to declare what would they do differently. Judging by the change of government in Lisbon earlier this year, after the Portuguese government lost the austerity vote, the answer is—nothing much. Papandreou does not want a repeat performance in Athens, and his decision presents the New_Democracy with a dilemma. As The Economist blog points out, “The hope is that the opposition, recognising that there is little choice but to implement agreed upon policies and understanding that the public is likely to reject the deal, will be forced to support the government’s austerity measures, thereby making the referendum unnecessary.”

On the more important foreign front, prima facie, it is those wily, Levantine Greeks—at their worst again—wrongfooting “Europe.” To make matters worse, they are doing so a mere three days before the G20 summit, which was supposed to garner foreign support (read: Chinese, possibly Japanese) for resolving the Eurozone debt crisis. For as long as the Greek outcome remains uncertain, no foreign government is going to give Europe the money for the enhanced bailout fund.

The referendum … is probably the final bell before Greece defaults and quits the euro,” The Guardian was quick to conclude. “The repercussions would be incalculable, for Greece but also for Europe.” The announcement came “out of the blue, it’s surprising, very risky,” says Norbert Barthle, the ranking member of Chancellor Angela Merkel’s Christian Democratic Union. French President Nicolas Sarkozy is “dismayed” by the Greek plan, according to Le Monde.

While the French have every reason to be unpleasantly surprised, the Germans may protest too much. Were they really surprised? Call me paranoid, but on the basis of platitudinous official statements, we still cannot decipher what was on the agenda five weeks ago during the visit to Berlin by Papandreou and his finance minister Evangelos Venizelos. Had it been to simply reassure the markets that they were willing to accept a comprehensive solution to the debt crisis, they could have issued a couple of press releases from their Athens cabinets. On the other hand, working out a subtle, mutually beneficial scenario with Frau Merkel would have required a discrete tete-à-tete encounter.

Let us speculate. On current form there is no doubt that the Greeks would vote “no” in the referendum—possibly by a two-thirds majority. As the date of the vote draws near (probably in late December or early January), the bankers—mainly French bankers holding Greek bonds, that is—will start sweating. Suddenly even the 50 percent “haircut” agreed on October 26 would look good in comparison to Greece’s sovereign default—the nightmare scenario that would follow a “no” vote like night follows day. A last-minute suggestion from Berlin to raise the “haircut” to 65 or 70 percent would still seem preferable to the prospect of getting nothing at all.

I’d say it is an even bet that the Parisians would go for it, thus further reducing Greece’s debt burden at no cost to the German exchequer and at bearable cost to the modestly exposed German banks. Sarkozy would have no choice but to recapitalize Societe Generale and others, thus jeopardizing France’s credit rating and making himself ever more vulnerable to various future diktats from across the Rhine. Papandreou calls the referendum off or else presents himself as a heroic David getting the best deal possible, hence winning the vote.

The writing is already on the wall. French banks exposed to Greek bonds slumped within hours of the referendum: Societe Generale tumbled 13 percent and BNP Paribas and Credit Agricole fell more than 10 percent. By noon Tuesday, the European bank index was down over six percent, wiping out the gains that followed the announcement of the EU rescue deal on October 26. European stocks sank to their lowest level in five weeks. (Washington may have been as surprised by Papandreou’s announcement as Paris, but has no reason to complain: Treasuries rose on the news from Athens, extending the biggest rally in 30-year bonds since March 2009.)

We could not predict the referendum, but the weakness of the rescue package has been evident all along. The euphoria just before the weekend was short-lived. Had I had a few million handy last Thursday and Friday I would have gambled on the put options, as the markets on both sides of the Atlantic swung up in response to the EU package. In reality it was not much of a “deal” to start with, and now it is in disarray.

Papandreou’s “bombshell” announcement appears to make little sense. His government is in jeopardy, his personal credibility with his EU colleagues is collapsing, and his chance of getting a “yes” vote is nil. And yet he is a shrewd politician, the heir to Greece’s foremost political dynasty.  Why would he do it? There is more than meets the eye here. What we need to ask is Cui bono?

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