The price of Greek democracy


The Greek prime minister's decision to give his voters the final say in a referendum has sent the markets reeling

It is easy to see why the Greek premier has announced a parliamentary confidence vote and plebiscite on the eurozone's latest bailout package.

He presumably takes the view that there is almost no chance of Greece going back to work unless and until the Greek people publicly endorse his and the eurozone's economic recovery plan.

If that plan is to be effective, it would impose major sacrifices on most Greeks, in the form of serious cuts in public services, higher taxes, a raised pension age and - perhaps most seriously - years of declining real wages.

But without the approval of the Greek people, without an end to crippling pervasive strikes, how on earth could this austerity be followed by economic recovery?

So although Mr Papandreou's decision to hold a referendum has shocked investors and eurozone leaders, to criticise him would be to argue both that democracy is a bad thing and (many would say naively) that a Greek revival could be possible in the teeth of opposition from Greek people.

Which brings us to what matters for the rest of us - what chance that the Greeks will vote yes to the rescue package?

Opinion polls wouldn't suggest there's a high probability of Mr Papandreou winning the day. But views can change.

What's in it for the Greek people? Well, their country is to receive an additional 100bn euro of bailout loans, so that it can continue to pay its bills. And there is a non-binding agreement with banks to cut what the Greek government has to repay them by half.

Why do countries go bust?

But this rescue package will deliver only a modest reduction in the back-achingly heavy burden of Greek indebtedness.

Even if all goes to plan in a fiscal sense - and it hasn't done that in Greece for years - the ratio of public-sector debt to GDP in Greece would still be 120% in 2020.

Which is still a good 20 percentage points above the ratio considered the upper limit for what would allow private sector and economy to thrive.

Or to put it another way, the rescue does not promise a bright new dawn for Greece any time soon. Or to put it another way, the only way for the referendum to be won by Mr Papandreou would be for him to demonstrate that the alternatives are far worse.

For the rest of the world, those alternatives look shockingly bad.

They could include, in no particular order of probability or potentially devastating impact on the stability of financial market, default by Greece, exit by Greece from the eurozone or a much more generous rescue deal.

Let's examine these.

A decision by the Greek government to renege on all its debts would impose huge losses on European banks, the European central banks and European taxpayers.

Such a default would raise the spectre of default by other over-indebted eurozone governments, which in turn would undermine the perceived solvency of some very big banks. We could be back in the territory of paralysis of the European financial system.

Or Greece might decide to quit the eurozone, so that the exchange rate would be able to fall to a level that would allow the Greek private sector to compete.

This could have the spurious attraction that it would mitigate the ostensible fall in Greek wages necessary for recovery.

But its impact on markets could be even worse than a default, it could be a default on steroids: if it became accepted that membership of the eurozone isn't forever, huge doubts would arise about the true value of hundreds of billions of euros of contracts.

All that said, it is possible that under threat of a no vote, eurozone governments could sweeten the rescue package. This would force banks to write off more of what they're owed and would impose losses on public-sector lenders to Greece, including the European Central Bank.

This might be the least worst option, but it would be painful for eurozone taxpayers and banks.

Unsurprisingly, therefore, European stock markets have tumbled - and shares in big banks are down around 10% or so.

All or any of these frightening scenarios would make it harder and more expensive for European banks to borrow - which has negative implications for European economic recovery and (in a worst case) could see a few banks falling over.

Nor is it especially comforting that Mr Papandreou's government could tumble before a referendum. Any immediate general election would be the equivalent of a plebiscite on the bailout deal, and would therefore be just as destabilising to markets.

All that said, last week's eurozone rescue package could unravel long before political events in Greece take their course.

All the uncertainty has again depressed the price of Italian government bonds, pushing up the interest rate which Italy has to pay to borrow to punitive and dangerous levels.

The gap between the interest rate paid by Italy and by Germany to borrow for 10 years is approaching an astonishing 4.5 percentage points - which, with Italian government debt equivalent to more than 120% of GDP, means Italy could find itself in a vicious spiral of debt-induced economic contraction.

A price is already being extracted by investors for the refusal of Germany to allow the eurozone's bailout fund to expand its resources to much more than a trillion euros, just about enough to refinance the maturing debts of Italy and Spain for a year or so, and provide a bit of support to banks and other financially challenged governments.

In other words, the putative remedy for the eurozone that was negotiated just five days ago in such dramatic circumstance - and which was supposed to be the definitive and final word on the subject - is in danger of disintegrating even before it goes before leaders of the G20 most powerful economies on Thursday and Friday for their blessing.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 358.

    georgy p just cancelled my greek holiday and u deserve thous to do likewise. pretty sneaky not to admit to ange and nik this was in your mind when the resc package was put forward as agreed. collect your taxes man!!! gonna out u cos u kno u will win a ref as no demis or nanna wants paid in drachmas

  • rate this

    Comment number 357.

    The Greeks and PIIGS all consider austerity to be terrible. And so it is.

    But they have enjoyed wealth beyond their means thanks to incredible borrowing by their servants. They should have read a broadsheet when they could afford one.

    They enjoyed a doubling of public sector wages and a retirement age of 61 years but they didn't know it was all down to state borrowing and undeserved

  • rate this

    Comment number 356.

    Why do they all want the Euro so badly?

    Germany represents 50% of the Euroland economy and it relies on the Euro to keep it competitive and help its exports. A higher Deuchmark would hurt exports.

    The other 16 members have relied on the Euro to keep import costs down and to get sovereign loans.

    They should all now realise they are better off without it.

  • Comment number 355.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 354.

    It probably doesn't matter what the people of Greece actually vote - if they get the answer wrong then, as is the way with democracy in the EU, they will likely be sent back to vote again until the get the answer right.
    The democratic deficit within the EU also needs radical attention.

  • rate this

    Comment number 353.

    The deal agreed last week was never going to be anything more than a sticking plaster on the Euro crisis. At least a Greek referendum (or maybe just the prospect of one) will bring things to a head. I say get the inevitable over with. We've been watching this slow-motion train wreck long enough.

  • rate this

    Comment number 352.

    Well... let me point out that that the issue in question is not whether Greeks will accept the austerity measures imposed on them. Papandreou has imposed them anyway, without asking. Is about other Europeans accepting loses either to avoid worse or the mere satisfaction of demonstrating solidarity! What about plebiscites in other Eurozone nations for the acceptance of the bailout?

  • rate this

    Comment number 351.

    A good piece of analysis by BBC and Mr Peston. I agree that default is totally inevitable, and I think it should be welcomed. Millions of Greek citizens shouldn't be made to pay so dearly for this mess via a lifetime of high taxes, low wages, low govt expenditure, etc. I think a revolutionary combination of options A & B will occur, and Greece won't be the only ex-EU country in a few years time.

  • Comment number 350.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 349.

    An orderly Greek default – probably the best alternative
    Does someone know how much Greek state loans are owned by Greek banks? This would be the critical issue for an orderly default. A corollary to the “understanding euro crisis" below
    for fun see also
    P.S. What did parliaments accepted before the last meeting of Eurozone?

  • rate this

    Comment number 348.

    346. beegee139:
    I read your comment. Whats your problem? Orderly or not G.+F. shouldn`t lead anybody. But my point was that they are already doing it. And they will do anything necessary to keep Greece floating until they think its safe to let it sink.
    You should read my comment before criticizing.

  • rate this

    Comment number 347.

    342. treacle_01

    ". . the problem is that even with a 100% debt forgiveness they still need to borrow to pay the bills."

    Only if they decide to consume more than they produce.

    "And if they default and write off 100% they will not be able to borrow."

    If they don't decide to consume more than they produce, they won't need to borrow anyway.

  • rate this

    Comment number 346.

    An ORDERLY Greek default - read again.

  • rate this

    Comment number 345.

    Papandreou can also point to the vulture funds perched ready to devour Greek sovereign debt @ bargain basement prices on Greek default & ask Sarkozy why he said it was a mistake to let Greece join the Euro & push billions of Euros in cheap interest rate loans at Sunmed when their economies had insuffficient growth.
    Greece must hold its nerve here & fight its corner & ensure Greek democracy.

  • rate this

    Comment number 344.

    If i have a loan and i dont make enough money to pay my monthly bill on it, and to eat and pay my bills, who will give a second loan??????
    Nobody, because they think if i cant pay for the first loan then how will pay for the second one!? So why is it different for a country? Who i..ot thought that this would work?

  • rate this

    Comment number 343.

    It isnt possible that everybody votes on everything..everyday of the year we would be going for votings! It is not possible,plus think about how much that would cost!Plus I would love call attention to the fact that just becuase we call something democracy it doesnt mean it is democracy. Otherwise Merkel and Sarkozy would not be able to dictate what 17 other country should do! Not just for Greece.

  • rate this

    Comment number 342.

    Surely they'd find it a lot easier to pay for gov't services if they weren't paying the interest on abut 350 billion Euros of debt.


    Yes. But the problem is that even with a 100% debt forgiveness they still need to borrow to pay the bills.

    And if they default and write off 100% they will not be able to borrow.

  • rate this

    Comment number 341.

    I don t see any politicians suffering from austerity measures! I didnt see from 2008 any politician suffer from anything!! Who suffered? We did!! They gave our tax money to the banks, we didnt get sufficient raise in salaries, but prices went up, they increased our taxes, etc... We have to make ends meat, not them and they still get to decid how we do it!!

  • rate this

    Comment number 340.

    #336. TommyBoy - "If they choose to default they will not be able to borrow foreign money ever again, their social and government services will grind to a halt .."

    Surely they'd find it a lot easier to pay for gov't services if they weren't paying the interest on abut 350 billion Euros of debt.

  • rate this

    Comment number 339.

    Its not possible to escape self interest.
    Who is going to vote for austerity and a 20% pay cut?
    Why cant we vote on raising taxes to bail out/give grants/rescue incompetent bankers and countries?
    Shouldn't the free market let failed institutions crash, otherwise what is the message?
    Are Merkel/Sarkozy are trying to protect tax revenues which would fall if Greece instigated a global recession.


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