Analysis

Greek debt is expected to rise to 186% of GDP in 2013. It is trading in secondary markets at a discount of about 67%. In the deal hammered out on October 26-27 (see EURO-AREA: EU 'solution' buys time but solves little - October 27, 2011), banks were told that if they did not accept a 50% haircut, they would have to take market value. To facilitate private sector involvement, euro-area member states agreed to add 30 billion euros (41 billion dollars) in 'sweeteners' -- a haircut of considerably less than 50%, but greater than the original 21%. It would apply to some 207 billion euros (57.5%) of debt maturing by 2035.

Arrangements were to be finalised by January. In the meantime, Greece was to receive the sixth tranche (8 billion euros) of the first loan facility in mid-November -- subject to the IMF contributing its 2.2 billion euro portion. This would tide Greece over until December, when a seventh tranche (5 billion euros) could be released, subject to the EU/IMF/ECB 'troika' evaluating as satisfactory Greek government implementation of the bailout's memorandum of understanding (MoU).

Greek disquiet

In Greece, the deal is perceived as ensuring a decade of austerity, after which the country would return to where it started in terms of its debt obligations. The troika demanded yet more consolidation measures to meet MoU benchmarks. On September 27, parliament introduced a swingeing new property tax. On October 20, it passed an omnibus bill that:

• slashed personal tax allowances;
• cut public-sector pay and pensions;
• placed 30,000 public employees on a reserve list on part-pay -- pending dismissal if they do not find an alternative job within a year; and
• changed long-standing collective bargaining arrangements that trade unionists consider acquired rights.

This last measure caused former Labour Minister Louka Katseli to vote against the bill and be expelled from Pasok.

Each parliamentary vote has been undertaken amid massive, violent demonstrations; some 15,000 riot police were deployed on October 20. Most galling for the Greek polity was the clause in the October 26 summit communique that called for strengthened monitoring of MoU commitments. This would entail large-scale secondment of civil servants from EU member states directly to advise Greek ministers -- depicted in the press as tutelage leading to loss of sovereignty, with the advisors portrayed as gaolers or occupiers.

Past defiance of Europe

This mindset underpinned the disruption of the October 28 Okhi ('No') Day celebrations, on the anniversary of Greece's refusal to capitulate to Mussolini's 1940 ultimatum. Protestors blocked a military parade in Thessaloniki, which was cancelled for the first time since the 1940s, and barracked President Karolos Papoulias, who left the podium in a high dudgeon. During a civilian parade in Athens, the municipal band draped their instruments with black crepe and students pointedly looked away from the education minister on the reviewing stand. These incidents have had a profoundly disturbing psychological impact on Greeks, who view Okhi Day as a symbol of national pride -- and themselves as having lost freedom of decision (see EURO-AREA: Bailouts pose democratic legitimacy risks - August 19, 2011).

Papandreou's referendum may represent a genuine effort to buoy an electorate seized by despondency and fear, which is gradually transmogrifying into disaffection with Europe. This is reflected in the results of a survey published on October 30, which showed 59% disagreeing with the euro-area's package, but 73% wanting to remain within the euro.

Papandreou -- pragmatist or populist?

At another level, Papandreou's proposal may be a ploy to defer the inevitable early elections that New Democracy (ND) opposition leader Antonis Samaras has repeatedly demanded (see GREECE: Elections seem least worst option - October 25, 2011). Samaras claims he would be able to renegotiate the austerity package without losing euro-area financial assistance.

Papandreou appears to have three considerations in mind:

• coercing party doubters into supporting his policies through the confidence vote;
• wrong-footing ND by putting it in the position of opposing a bailout package; and
• putting pressure on foreign banks resisting higher haircuts by implicitly threatening that they might have to accept the market's greater write-down.

The referendum's terms of reference will cover the EU loan agreement. There has been no hint of whether it will deal with its specific terms or broader political issues, such as Greece's position in the EU. One suggestion has been to ask voters whether they want to remain within the euro-area; this would elicit a resounding 'yes'.

Euro anger

Papandreou has infuriated his euro-area peers, who fear that opening up the Greek part of the tripartite deal might call into question the whole package. Eurogroup Chairman Jean-Claude Juncker has gone so far as to threaten obliquely that if the referendum goes ahead, the agreed sixth tranche could be revoked. The EU's portion is contingent on the IMF share, yet to be approved; the Fund requires that any aid recipient have financing secure for a year ahead, which is now less clear owing to Papandreou's referendum proposal. The rule could be invoked if it were felt that Greece needed to be 'punished'.

Election outlook

Reaction within Pasok against the MoU and its monitoring, and against Papandreou for having acquiesced to them, is such that he will almost certainly be impelled to call early elections instead of the referendum.

Opinion polls show Pasok trailing ND by seven to eight percentage points, but ND lacking the votes to govern alone. The options would be ND governing with one or more minority parties, or seeking a coalition with Pasok; the latter would depend on whether a successor to Papandreou would be prepared to cooperate. The party would be hard-pressed not to, as it has repeatedly asked ND to enter into some form of consensus government.