I am hardly qualified to provide a solution to the problems Greece and Europe are having, but I do think that George Papandreou is getting a bad rap for calling for a referendum of his citizens on the latest bailout plan offered to his country by the other members of the Eurozone. As I understand it, while banks would have to write off 50 percent of their loans to Greece, its government would have to institute even more austerity programs than it already has. Given that Greece’s people have been demonstrating in the streets against the previous austerity programs, it seems to me that they’re tired of having these things forced on them by a bunch of snooty Eurocrats. So Papandreou seems to feel, as I would, that since they’re the ones who have to suffer, they ought to get a say in whether they should or not. Look, Democracy!
This has discombobulated European finance ministers, who seem to think that they have the right and authority to make decisions from the top down and let the devil take the hindmost (in this case, Greeks). Papandreou is reading his countrymen correctly, I think, when he says they are tired of this. Many of them have been forced into unemployment by previous actions the Greek government has taken in order to get bailouts, and they’re wondering how they’ll survive with yet another round.
See Kevin Drum for an off-the-cuff discussion of what happens from here.
Drum has a pretty good summary, but he actually leaves out the thing that really has the European politicians wetting their pants: the credit default swaps. I wrote those up myself in October 2008, after listening to a This American Life broadcast, the post was called What a Week; basically I wrote it up so I could make sure I understood it.
Read that post, and every time it says “corporate bond,” substitute “Greek government bond.” There are at least billions of dollars of credit defaults swaps on Greek debt that are sitting out there, and if Greece defaults on any of its debt, all the credit default swaps on Greek debt are triggered. The insurers have to pay out in full, even if the default is only partial. That’s why there’s been all this chat about a “voluntary” haircut. They all hope desperately that if the bankers agree to a haircut, it won’t be considered a default, because it was negotiated, see?? But if Greece votes no on the referendum and drops out of the euro, that is a default, no question.
And nobody exactly knows who wrote those CDS’s or how much they’re worth. Or who will collect on them; remember, you don’t have to own a bond to buy a CDS on it…
And you thought the crash was over.