Greek Prime Minister George Papandreou seems like an intelligent, honest and patriotic man. His country’s back is against the wall, and he is exasperated with his citizenry for demanding what it cannot have.
So while global leaders, especially his European peers, no doubt felt betrayed by Papandreou’s call for a referendum on last week’s financial bailout agreement, they ought to pay close attention when Papandreou explains why he did so. His motive wasn’t his own political survival. It was desperation. Papandreou wants to roll the dice because he feels he has no other choice.
Greece can either come to terms with its creditors to gain some debt relief and stay in the eurozone, or it can renege on its debts unilaterally, be forced out of the euro and experience an excruciating banking crisis and rampant inflation. Either way, the Greek people – who already believe they are suffering for the benefit of bankers and other unworthy elites – will experience more austerity. Papandreou knows this. Many of his people apparently do not.
Greeks have taken to the streets in wave after wave of protests and strikes since the country’s debt crisis began two years ago. They resent the cuts in government spending, the reduced salaries and pensions, the higher taxes and more aggressive enforcement (by local standards) of tax laws, all of which the country’s foreign partners demanded in exchange for financial aid. Greeks want to say no to austerity. But they also want to say yes to the euro, which gives them far greater purchasing power and access to capital than they can expect if they revert to the drachma, the national currency Greece abandoned a decade ago.
They can’t have it both ways.
The Greek government owes nearly $500 billion, a total that is already more than 160 percent of the nation’s annual output and rising steadily. There is no chance whatsoever that this sum is going to be repaid in full and on time. The agreement from Oct. 27 would have required banks that hold Greek government debt to reduce their value by 50 percent, or 100 billion euros (nearly $140 billion), and it would have expanded Europe’s emergency financial stabilization fund to 1 trillion euros, with 100 billion set aside for future aid to Greece. Greece would have been required to implement further austerity measures and financial reforms in order to receive the money. The goal was to bring Greece’s national debt down to 120 percent of annual output – still a very high level, but potentially serviceable – by 2020.
Greece expects to receive 8 billion euros in mid-November from the International Monetary Fund, the fifth round of aid from an earlier, too-small bailout deal. Athens needs this money to pay its bills until January, when the referendum may be held. It is not clear, however, whether Papandreou’s call for a plebiscite is going to put the November disbursement in doubt.
Without that money, the scenario everyone has been trying to avoid – Greece’s disorderly default on its debts – may be just weeks away. Part of Papandreou’s gamble includes a bet that Europe and the IMF will not let that happen. Having persuaded his cabinet, on Tuesday, to back the referendum call, Papandreou was headed yesterday for a Group of 20 summit in Cannes, France, to make his case to the leaders of the world’s major economies, including developing nations like China and India, which are being asked to invest in Europe’s financial restructuring.
It is a safe bet that the audience for Papandreou’s explanations will be, at best, deeply skeptical, and in many cases flat-out furious. French President Nicolas Sarkozy and German Chancellor Angela Merkel invested a lot of their own political capital in last week’s deal. Papandreou did not give them even the courtesy of a phone call to alert them about his decision to seek a referendum. That is not the way to win friends in the top echelons of world politics. Even a smart man can make dumb moves.
But his clumsy political handling of the referendum does not necessarily mean Papandreou is wrong to seek it. He knows the Greek people are going to pay a heavy price, no matter how their debt burden is resolved. A settlement along the lines of last week’s pact is far more appealing than an uncontrolled financial collapse, but since the Greeks are the ones who have to implement that settlement, they first have to accept it.
Some Greeks decried his call for a vote as extortion. I suppose that’s true, if by extortion we mean forcing someone to make a choice and accept the consequences, which is what being an adult is about. Greeks who oppose Papandreou’s efforts want choices without consequences.
Papandreou’s gambit could easily fail. What will happen if Greece rejects the Oct. 27 deal? Possibly Europe and the IMF will offer a better deal to avoid collapse, but I doubt it. There are too many other big debtors out there – Portugal, Spain and especially Italy among them – who might see refusal to pay what they can pay as a productive negotiating strategy. There is a much bigger chance that rejection would lead to Greece’s financial collapse and departure from the euro.
What would that do? In the short term, it would almost certainly send financial markets into a tailspin. But I think that would be short-lived, because it would shortly become clear that non-Greek banks had access to whatever government resources they needed to withstand the shock. And since Greece would eventually need to get back into the global borrowing market, it would someday need to make good on some part of its outstanding debt.
On the other hand, passage of Papandreou’s referendum would establish that the demonstrators in Greek streets do not speak for their country. Approval would get Greece started down the road toward recovery.
Papandreou apparently sees this as a risk worth taking. It is fair to disagree with him, but I don’t think it is fair to blame him. This is a man whose back, and whose country, are against the wall.