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Greek Referendum Announcement Plunges Financial Markets into Chaos Amid Fears of Default

Posted on the 01 November 2011 by Periscope @periscopepost
Greek referendum announcement plunges financial markets into chaos amid fears of default

Anti-austerity measures provoke riots in Greece, May 2010. Photo credit: REUTERS/Icon/Panagiotis Tzamaros

Trick or treat? Greek PM George Papandreou made the shock announcement on Monday that the proposed aid package will be put to the popular vote in December or January. According to Philip Aldrick in The Telegraph, the Greek prime minister said: “If the Greek people do not want it, it will not be adopted.” Aldrick described the referendum as “a high-stakes gamble designed to win greater legitimacy for austerity”.

“We can claim that a new day has come for Greece, and not only for Greece but also for Europe,” said Greek PM George Papandreou last week in response to the bail-out plan.

Doom and gloom. But is this a gamble the prime minister can win? A recent poll shows the majority of Greeks are against the bail-out plans, which include stricter austerity measures, and there have been popular protests against existing budget cuts. Writing for the BBC, Gavin Hewitt was pessimistic about the PM’s ability to win over an embittered public: “He will argue that it is in Greece’s national interest to support the deal. Without it, he will say, the country faces default and catastrophe… But, on recent visits, I have found many people would prefer the chaos of default to years of hardship,” he said. Dina Kyriakidou reported for Reuters that Greek opposition parties object to the riskiness of the referendum, and quoted a New Democracy spokesman as saying: “Mr. Papandreou is dangerous, he tosses Greece’s EU membership like a coin in the air.”

Question of legitimacy. Kyriakidou also reported that some parliamentarians are questioning the legitimacy of the planned referendum, as the Greek constitution does not allow referendums on economic matters. Meanwhile, Helena Smith wrote on The Guardian‘s Live Blog that the exact question posed by the referendum is crucial. If the vote comes down to whether or not Greece should stay in the euro, then the measures will likely pass; but “if it is framed in such a way that Greeks are asked whether they agree with the latest bailout for the country, and the painful austerity measures it engenders, then it will likely be rejected”, Smith said.

Markets panic. Global financial markets had rallied after the eurozone rescue package was announced last week. But the referendum revelation has seen a reversal, with the FTSE dropping 150 points at one stage during morning trading. The BBC‘s Robert Peston tweeted that the market jitters make sense given that the referendum “shortens time horizon to possible Greek default and possible Greek exit from euro”.

“The eurozone has adopted a credible and ambitious response to the debt crisis,” said French president Nicolas Sarkozy after the eurozone rescue plan was announced last week.

Bad deal? Writing on a Wall Street Journal blog, Simon Nixon suggested the eurozone bailout package was flawed anyway: “The debt deal was patently inadequate, not only leaving Greece’s debt burden at a level that few believe is sustainable but also capping the possibility of future debt relief from the private sector.” Nixon argued that the Greek referendum will stoke fears that EU leaders cannot control the crisis, as eurozone countries still have the option to act in national self-interest rather than going along with plans devised at summits.

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