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03 November 2011
A three billion euro (S$5.27 billion) bond issue of the European bailout fund has been delayed because of the crisis surrounding the proposed Greek referendum.
After rallying early yesterday, European stock and bond markets subsequently weakened, while German, French and other key leaders raced to Cannes to hold emergency talks with Greek Prime Minister George Papandreou.
The delayed bond issue was regarded as damaging ahead of the Group of Twenty (G-20) summit that begins today.
At the meeting, further details of the European Financial Stability Facility (EFSF) are expected to emerge.
At last Thursday’s meeting, eurozone leaders had agreed that overall lending powers of the 440 billion euro facility would be levered upwards by four to five times. Expectations are that the EFSF will have at least one trillion euro lending firepower via insurance guarantees to cover initial potential losses on its bonds. Details have to emerge in the hope that overseas investors such as China will place money in the bonds.
Due to Mr. Papandreou’s Cabinet decision to hold a referendum on last Thursday’s proposed bailout of Greece, G-20 nations hope to hammer out a deal with the beleaguered government.
Mr. Papandreou met French President Nicolas Sarkozy, German Chancellor Angela Merkel, European Central Bank president Mario Draghi, International Monetary Fund Managing Director Christine Lagarde and European Union (EU) officials, according to a statement from Mr. Sarkozy’s office.
The threat is that a further loan tranche to Greece will be delayed in coming weeks unless there is an accord, according to statements emerging from European officials.
Mr. Papandreou’s announcement ‘surprised all of Europe’, claimed Mr. Sarkozy. Yet official Greece spokesman Ilias Mossialos said yesterday Mr. Papandreou did inform the EU of his intention for the referendum, according to an AFP report.
Some observers and economists also believe it is inconceivable that the Greek premier would have announced the proposed referendum without the prior knowledge of France and Germany.
They contend that the hysterics of leaders could well be theatrics with smoke obscuring the stage. It would thus not be surprising if history eventually discloses that there was a secret deal between Germany, France, Greece and possibly Italy or another country.
Significantly, Mr. Sarkozy admitted in public after last Thursday’s summit that Greece’s entry into the euro zone had been a mistake. Such an admission was regarded as French political heresy in the past.
Mr. Sarkozy’s disclosure was thus a significant hint that the main creditor nations of Greece have begun to prepare for default and a possible exit from the euro.
This isn’t mainstream commentary and reporting at the moment, but such a development may well emerge after either a referendum, which is now expected to take place before Christmas, or Greek elections.
‘The announcement of a Greek referendum on the second bailout package seems to have pushed the country one step nearer to the exit door,’ says Steven Barrow, economist at Standard Bank. ‘The real question for Greece is whether life outside EMU (Economic and Monetary Union of the European Union), however harsh, is likely to be better than remaining in the system.’
‘Almost always defaulting countries have the cushion of devaluation,’ Mr. Barrow adds. Greece does not have this at the moment which makes the adjustment hard. Many will think it is too hard.’
According to a recent poll in the Greek newspaper Kathimerini, 66 per cent of Greeks believe that returning to the drachma would be bad. But The New York Times reported on Tuesday that proponents of a euro exit say more Greeks are beginning to question the euro.
‘The view that Greece should exit the euro is more widespread than you would think,’ Costas Lapavitsas, a Greek economist at the University of London, told NYT. ‘It is just that the opposing view is so dominant.’