The latest plan is supposed to be a triumph for Merkel and Sarkozy, wrestling a 50 per cent haircut from bondholders. Markets seem to like it. It's announced on a Thursday, with a boost for a day on Friday. And then, the markets tank again the following Monday when the news came out that the Greek prime minister intends to call for a referendum for the public to decide whether they want to accept this latest bailout plan and to stay with Euro as their national currency or not.
Germany and France must be furious, having worked so hard, wrestled so many arms to get to this deal in order to try to save Greece from default, only to have Greece seemingly reneg'ed on it. But I see it a little differently. The call for referendum is such master stroke.
The Greek general public has been staging protests and riots to vote their disapproval of the austerity programs and budget cuts that must be pushed through in order to pay down the sovereign debt. The public generally loves staying with Euro, and Greece in general has benefited greatly from joining Euro, with borrowing rate going down substantially in the past decade. That allows its economy to grow without really addressing the underlying issue of poor productivity and required reforms to make the country more efficient and productive. With the recession in its third year now, Greece can delay the pain no more.
The public blames the government for bringing on the pain from necessary austerity measures, but is the government really the only one to blame? Everyone has been drinking the Euro kool-aid, thinking the money spigot will never run dry. Nobody wants to check the worst-case scenario in which the government can no longer borrow, nor can the private sector. The money has to come from somewhere.
The Greek prime minister must have realized that this latest bailout plan will only last for a short period of time, and then the next batch of sovereign debts are going to come due, and then Greece will have to go begging to Germany, France, and maybe even China, again. Rather than having the ruling party take the blame for all things ill, this referendum is going to put the onus back on the people. Do they really want to be rescued, and with that, tightening their belts drastically? Do they really want to stay with Euro and endure all these pains? If the vote is yes, then they're all in it together. There's no more blaming of the Greek government alone in forcing the austerity measures on its people, because the people have voted 'yes.' There is no more blame of Germany either, for imposing harsh terms on them either, because they have accepted the fate. But if they vote 'no,' then the current Greek government will go down.
In a way, it's probably fitting, that we should see such thermonuclear option. Afterall, it's the ultimate democratic gesture, in a country where all western democracy found its seeds. The people have to decide. The ruling parties are no smarter than the collective wisdom. No one should be imposing anything on the people. If you ask my opinion, I'd say, the move is brilliant.
Obviously, the outcome is likely to be messy, with huge uncertainty and overhang. But, hey, democracy is messy. Nobody expects democracy to be clean and neat. If they do, they would all go to China where the elite Politburo decides everything in the country. Most analysts and governments disagree with the proposed referendum because they want more certainty, and they don't want to hear the possibility that a majority of Greeks would rather risk leaving Euro than to suffer under the austerity measures for years (even decades) to come. As Arab Spring and even the wars in Iraq and Afghanistan have shown us, sometimes what the people want do not necessarily equate a political palatable solution to foreign governments.
Greece is not alone in the mess. Italy and Spain are scarier and much bigger version of the sovereign debt mess. Germany and France would want (and need) to save Greece and beyond since the banking and financial systems in the countries are so intertwined and connected so tightly with the government debts. If Greece defaults or Euro breaks up (with some of the countries quitting the Euro currency), the ramifications would be huge for the global markets.
I'm not sure how it'd play out, but I don't feel like being in the stock markets right now.
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