If you had any doubts about the intent of the Eurobailouts, the latest news should settle them. The game plan was to severely limit Greek sovereignity and assert the primacy of creditor rights, even if they came at the expense of democracy. Greece, as we described in a post earlier today, threatened to blow up the bailout by having a referendum. That measure, even if it took place before year end, would create massive uncertainty and wreak havoc with other efforts (for instance, getting China to contribute cash to the levered EFSF, the bailout funding vehicle. As we’ve detailed in earlier posts, it is unworkable in the absence either of ECB backing or substantial outside funding).
The Eurocrats have decided to try to push Greece into line, threatening expulsion from the Euro (note, not the EU) if Greece does not back down. From a practical matter, if the Greeks were to turn down the bailout package, it would lead to a banking crisis, making a Eurozone exit a not that much more traumatic incremental move with considerable upside. And under the Maastrict treaty, Greece cannot unilaterally exit (although as various commentors have pointed out, Nato is not going to send in tanks if the Greeks were to do so).
But this may be an appeal to the Greek public, or more likely, an effort to break Greek prime minister’s Papandreou’s thin coalition on the eve of a vote of no confidence. Recent polls show 66% of the Greek public favors remaining in the Euro (some NC readers questioned those polls, and I’d love to see how the questions were posed). Greece has already made some concessions, moving up the referendum date to December 4 or 5 when it had been targeted for January. Note that this is before the time when Greece is expected to run out of cash, mid-December, and the officialdom (per the Wall Street Journal) has not disbursed the quarterly aid payment of €8 billion that Greece needs to remain solvent beyond that date.
But this may be too late. The expectations of the Greek public may have been raised by the referendum announcement, and it may be impossible to put that genie back into the bottle. If civil unrest rises, the government will be forced to come to heel, EU pressure notwithstanding.
From the Wall Street Journal:
Europe’s leaders, making plain that they’ve reached the end of their patience with Greece, demanded that the beleaguered nation declare whether it wanted to remain in the euro currency union—or risk going it alone in a dramatic secession.
“Does Greece want to remain part of the euro zone or not,” German Chancellor Angela Merkel said. “That is the question the Greek people must now answer.”
The extraordinary rupture with the rest of Europe—whose leaders have insisted for months that an exit from the currency union is simply inconceivable—follows Greek Prime Minister George Papandreou’s stunning decision Monday to call a referendum on his country’s bailout.
Update Midnight: The Wall Street Journal account, which seemed to be first out of the box, indicated that the €8 billion payment was being withheld, assuring a Greek default as of mid December. The Financial Times put that issue front and center in its account:
European leaders suspended an overdue tranche of €8bn in international aid to Athens and demanded Greece make a clear decision on whether it wanted to leave the eurozone at a dramatic meeting on the sovereign debt crisis on Wednesday night.