Tuesday 1 November 2011

Greek Referendum

Just as you thought that the Greeks are no longer an issue and that the focus would be shifted to Italy and Berlusconi, the Greek PM Mr. Papandreou threw a huge spanner in the European works by calling a referendum on the PSI. Emotions aside let’s have a closer look at what was announced, how it is going to work and what it means both for Greece and Europe and the markets.

  • A Referendum to be called on the PSI after the final details of the plan is known. The most likely date would be sometime in January. According to the EU decisions the PSI is to be finalized by December and executed on January. 
  • PM has asked for a vote of confidence from the Greek parliament. This is to take place after a 2 day debate and the voting would start at midnight on Friday 4th November.

Vote of Confidence
In our view the real news is the Vote of confidence and not the referendum. Here is why:
  • The government’s popularity is at around 18% which is probably less than the number of PASOK party members. 
  • The Greek public is outraged by the continuous injustice when it comes to the various Taliban tax raids. We have said this before; the brunt of the taxes fell on mostly honest taxpayers (pensioners, salaried workers) with little room to cheat on them or excess fat to shed. 
  •   Greek public is totally incensed at the inability of the Greek government either to tackle tax evasion or to punish politicians who we have clear proof that they used their time in office for profiteering.  This enforces the view that there is kleptocratic system of values(sic) that is shared by both major parties. 
  •   The usually outspoken, bubbly and publicity junkies MP’s are currently shy away from public appearance as they are booed or even physically attacked almost everywhere they go. Last week, protesters even disrupted the sacrosanct National day (28th Oct) and verbally abused the president of the republic, calling him a traitor to his country.
  • This is a highly charged political and social environment and every government MP would be contemplating his exit strategy form this mess, including perhaps the PM Mr. Papandreou.

“No” Outcome to confidence vote.
Under the circumstances we find it difficult to believe that Mr. Papandreou would survive the confidence vote. If the government MP’s vote again for him then they would be called to vote even more unpopular reforms and accused of causing the Greek exit from the Eurozone and the subsequent degeneration into a failed state, should the referendum result is NO. We therefore, expect the PM to lose it. It actually suits him very well, as he would claim that he did his democratic duty but his party was unable to follow him or that he betrayed him.

If Mr. Papandreou loses, it is not the end of the world. The PASOK (government) party could regroup under a new leader (guesses here are Diamantopoulou, the former EU commissioner and currently Education minister, or Mr. Venizelos or someone who has not burnt many feathers in the last few months). So scenarios are:
  • Papandreou loses the vote and declares elections
  • Papandreou loses the vote and he steps down. Party elects a new leader who in turn asks for a vote of confidence in forming a new government. Or he forms a new government with a view to have elections very soon.
Coalition with new leaders or political parties?
If there are elections then the most likely outcome is a hung parliament and no clear winner. With Papandreou out of the picture the two major parties would find it easy to agree on some form of a coalition government that would implement the changes needed. We might even see a rebellion in the conservative opposition and a breakup forging new political parties. The danger of course is that the then Greek party leaders might disagree throwing the country into chaos and eventually force a disorderly default and exit from Eurozone.

“Yes” Outcome to confidence vote.

If the PASOK MP’s chose to support Mr. Papandreou (all other parties said no already) then it may by a pyrrhic victory for Mr. Papandreou. He would be not only severely wounded internally but European politicians would have every right to be outraged and sick and tired of the byzantine politics that the Greeks play. So:
  • With European support disappearing Greece would move faster to a disorderly default with unpredictable consequences to the rest of Europe. The Greek PM may play the nationalistic card and ask for exit from Eurozone. Mr. Papandreou sold himself to Europe as the good reforming guy that is on Europe’s side. Most European politicians are now realizing that this may not be the case as he renegaded on all his promises for reform, time and time again. Mr. Papandreou now is willing to risk the future of Greece and the stability of Europe. 
  •   Europe decides to turn a blind eye to Mr. Papandreou’s political gambles and supports Greece with yet again a new bailout. This would have to be the case as the agreement reached on the 27th Oct is for most practical purposes dead. Thus, unless his move was done with some form of informal nod from Germany and France we find difficult to envisage how he can survive.
  • If Europe decides to support him after the Yes vote, then the next hurdle is the G20 summit in a week’s time. A new rescue package would have to be negotiated as time would be running out not just for Greece but also of Italy and other peripheral countries.
Referendum are NOT binding

There are many aspects of the referendum that make it complex. Let’s assume that Mr. Papandreou survives the confidence vote and that Europe decides to support him. In January the referendum will be held on the PSI deal.
  • Under the new law Referendums are NOT binding to the government. So a resounding NO does not mean that the Greek government would oblige. He may call elections or hang into power depending on the new deal that would need to be worked out with Europe. In this case, Mr. Papandreou played for time blackmailed Europe into a better deal for him. 
  •  If the vote is YES then Mr. Papandreou pulled huge rabbit out of the political hat and can be hailed as a savior.

We believe that most likely it would never come to the referendum and that political development would take a very dramatic form in the next few days.


For most purposes the PSI deal is dead just 3 days after it was reborn. Why chose to participate in it when the deal might be reversed in the referendum. Becoming a hold out now seems to have more benefits than joining in. Many bondholders would have written the bond down to 50 and would be more than willing to stay out rather than getting a new Greek bond.
Greek banks and Greek pension funds would take a disproportionally big hit if the PSI proceeds in its current form. The Greek Pension funds were obliged by law to invest in Greek bonds and the Greek banks never really had any choice. Now they are being punished for supporting the government. Any new PSI should in principle exclude the Greek Banks and Pension funds if Europe wants a sustainable solution.

With the agreement of the 27th October dead, the IMF funding for the next 12 months is dead too. Thus we should expect them to leave and either Europe pick up the tab or face again a disorderly default.


To draw any conclusions at this very volatile time is overly ambitious. For all we know, the Greek PM might not even survive the next day never mind the confidence vote as senior members of his government rebel. We however are of the opinion that there would be no referendum held in the end and that Europe would have to go back to the drawing board for a new this time Pan-European solution and not just another Elastoplast. Mr Schäuble must be wondering what on earth happened. There is a great German tradition in studying classical Greece and German scholars are the best in the world, perhaps it would pay if they start studying the modern Greeks a bit more.