1 Nov 2011

Greek bombshell disarms eurozone bazooka

The damage is done. Measure the impact of the Greek bombshell not on Greek politics but on what it has done to Italian, Spanish and French borrowing costs: Share prices have basically crashed, and government borrowing costs spiked.

Remember that the European Central Bank (ECB) is in the market buying Italian debt today (on the day an Italian becomes European Central Bank president). Despite this, BTPs (get used to that acronym – it means Italian government bonds) bond yields have spiked up to above 6.3 per cent. The ECB is offering almost free money to traders that buy Italian debt, yet still costs rise to the point of no return.

And there’s more. In Ireland opposition politicians are beginning to question whether they should be repaying the odious debt inflicted upon their nation by AngloIrish bank. Part of that payment is due tomorrow. In Portugal there is also talk of renegotiating their bailout. Of course the Greek situation is conditioning politics in the other programme nations.

This is the nightmare scenario. Greece is irrelevant to the eurozone’s fiscal arithmetic. Its entire deficit is an accounting adjustment on Germany’s market for bonds. But if Greece begins to set an example for other countries, then the euro is in a very difficult spot. Even if tomorrow’s Italian bond auction goes well, then just imagine how the shock news from Athens was received by the Chinese, Japanese, and Gulf nations who have been hosting the road-shows of the euro’s bailout fund – the EFSF.

As I explained from Brussels last week, the half-bazooka announced by the EU needs the help of China, Japan and the likes of the IMF. Would you commit your nation’s collective savings in these circumstances?

I say this even as I believe the Greek referendum is highly unlikely to occur. That is the mood music I get from Greece. Bond traders are scratching around at the constitution, which seems to suggest that there should not be referenda on fiscal matters. Article 44 here. Parliament and the Greek President would also have to agree to the idea of a referendum. I’m not a Greek constitutional expert, but as there hasn’t been a referendum in Greece since 1974, there aren’t many that are. All previous referenda have been about constitutional change.

To quote a leading Greek businessmen: “Nobody I’ve talked to knows exactly why these announcements were made yesterday by the PM”. Indeed it is rather telling that it is not just the markets that were shocked by last night’s announcement. Greece’s own finance minister was apparently not informed about the referendum plan, though he knew about the confidence vote due on Friday at midnight. He checked into hospital this morning.

The government’s PASOK MPs were not permitted to comment after Papandreou’s speech yesterday. But they did this morning: One has resigned and one has called for a government of national unity. A government health minister has been quoted as saying the referendum “is not going to happen”. Six Pasok officials have called for Papandreou’s resignation.

It does seem that George Papandreou has made this decision alone. There is an intriguing debate as to whether he informed Chancellor Merkel at the EU Summit last week. Accounts of that summit from Athens suggest he did, but that it might have been lost in translation.

And then to something far more straightforward – Papandreou’s government looks unlikely to survive much longer. A majority of one is no majority at all. The opposition has signalled that it will not proceed with a referendum.

But whether or not we get it the damage is done: The euro-rescue facility has been severely undermined.

Follow Faisal Islam on Twitter: @faisalislam