What The Greece Referendum Really Means

Global stock markets were in a tailspin early Tuesday in response to the surprise announcement Monday that Greek Prime Minister George Papandreou will hold a public referendum to let the people vote on whether or not to accept the new bailout and debt deal offered by EU leaders.

"We trust our citizens, we believe in their judgment, we believe in their decision," the embattled Prime Minister told lawmakers yesterday.

The WSJ reports that the public referendum is expected to be held in January. However, EU officials report that they have not been formally notified by the Greek government of the referendum.

At first blush, it appears that Papandreou is doing everything he can to ensure that the public unrest dies down. First, Papandreou will attempt to obtain a new confidence vote in his government. Although the PM has a slight majority in the parliament, there is no guarantee the vote will succeed. However, if Papandreou comes away with a vote of “yes” on his government, he will effectively have a mandate to take the debt deal to the public.

But in reality, it is the opposition party in Greece that appears to have demanded the public referendum on the debt deal. So, it goes in politics, regardless of the country.

The thinking is that a “yes” vote from the public would put an end to the massive demonstrations and union strikes that have paralyzed Athens. However, a “no” vote would like end Papandreou’s government and threaten to send the country into a financial meltdown.

There are two key points as far as the markets are concerned. First, the referendum vote puts the possibility of a “messy” default in Greece back on the table. And second, it appears that the vote is actually about whether or not Greeks want to stay in the EU.

Alexander Stubb, the Finnish minister of European affairs, said in a TV interview that a Greek referendum on the bailout deal would be a vote on its Eurozone membership.

Obviously leaders in the Eurozone are none too happy about the developments. Reuters reports that one senior German parliament official suggested the Eurozone might cast Athens adrift, cutting off its aid lifeline and allowing the nation to default on its huge debts.

"This sounds to me like someone is trying to wriggle out of what was agreed -- a strange thing to do," said Rainer Bruederle, a leader in German Chancellor Angela Merkel's political coalition.

However, threats of cutting off international funding and potentially forcing Greece out of the Eurozone would likely trigger another round of financial market panic, which, according to StateoftheMarkets.com’s David Moenning, is not a likely outcome.

There are also reports Tuesday morning that “Team Merkozy” will jump into the mix with Greece today. French President Nicolas Sarkozy and Germany’s Angela Merkel are said to be setting up a conference call today to discuss the situation.

Stay tuned, it looks like we’re all STILL on Greece-watch.

 

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