There won’t be a referendum in Greece after all. The Greek prime minister George Papandreou has backed down, most likely because the referendum was, to say the least, not popular among investors. It was even less popular among the other countries in the Eurozone, in particular France and Germany who has been keeping Greece afloat (or should we say, kept Greece not too far away from the surface of the water).
I mentioned this possibility in my last post, that the referendum might be called off if Papandreou thought there was no chance he could win it. I think this is exactly what happened, with polls showing 60 % opposing the deal and Germany making it very clear they wouldn’t give Greece any money before they accepted the deal. The referendum was supposed to be held in early january, and Greece has repayments of 8 billion euros to make already in mid-december that they can’t afford without help from the other Eurozone countries.
In short, Papandreou had to choose between a referendum in early december, which he was absolutely certain to lose as it wouldn’t be enough time to educate people about what a default would mean (barely enough time to organize a decent fear mongering campaign which I suggested he should have done in my last post), or to simply call off the referendum.
I think he made the right choice.
Not because the bailout will solve the problems, but because it definitely helps Greece. If you’re going to have to make extreme cuts anyway, why not accept a debt reduction in return for doing it? They’ll have to do the cuts anyway.
But people still won’t accept it. This is one of the problems with “fiscal crash diets“, such as the one Greece is forced to endure: It’s hard to stay motivated for long enough for them to work. The Greeks, like the Irish, think they’ve endured enough austerity already and think they deserve to reward themselves with a cake or at least a slice of pizza. Unfortunately, both countries will have to stick to the broccoli soup for a long time to come. If they don’t, pretty soon they’ll be back at square one.
How will markets react? I’m sensing many investors will be relieved that Greece is sticking to the original plan and accepting the bailout after all, and so I think it’s likely that stock markets will go up today friday.
Yet, give investors a weekend to think about it, and they’ll realize the underlying problems haven’t been solved. Any celebration tomorrow will be shortlived. Come monday, and we’ll be back to normal again.
That’s enough for now. Thanks for reading.