Greek Curve-Ball

Greek Prime Minister Papandreou, evidently acting alone and to the surprise of his own party, called for a Greek referendum on the most recent bailout plan—throwing markets for a loop Tuesday. We expected political back-and-forth politicking to continue following the plan’s announcement—and Greece delivered a hearty dose.

The move may very well be Papandreou’s attempt to call the bluff of critics of the plan at home. It’s been clear there is opposition to the required austerity measures. However, at the same time, polls indicate most Greeks favor staying in the eurozone, meaning a “no” vote on the planned bailout isn’t a slam dunk. It seems Greeks generally see the benefit of remaining in the monetary union but don’t necessarily like the way the medicine tastes.

Should it go to a vote, early polls indicate Greeks are about evenly split on the bailout, but that was before Papandreou made statements essentially linking the bailout vote to a vote on euro membership. But even if the bailout’s current structure is voted down, a disorderly Greek default or euro exodus isn’t certain. Keep in mind, bailout terms have already been modified multiple times (with considerable foot-dragging and politicking along the way). It wouldn’t be unprecedented or even all that surprising to see the troika respond by offering up austerity concessions to appease the reform-fatigued Greek populace.

Then there’s the possibility a referendum may not even occur. Papandreou must survive a confidence vote later this week, and two of his party members have bolted, leaving his Socialist party with a slim one-member majority. Additionally, international pressure to drop the referendum is already on and likely only builds as political leaders head into the upcoming G20 summit—where Greece likely suffers some severe finger-wagging.

Though Greeks may prefer their government keep up its pace of spending, the reality is Greece doesn’t have the money and can’t borrow from anyone but the troika. Whether Greece would be better off long term as a euro member is debatable, but a disorderly default and euro departure would arguably involve more near-term pain for the Greeks than current austerity requirements, increasing the likelihood of some sort of compromise. Ultimately, the political back and forth continues.