With financial markets across the globe nosediving on news that Greek Prime Minister Georgios Papandreou will offer his constituents a referendum on the austerity package contained in a bailout agreement reached last week to save his country from default, most reporters and commentators have failed to consider the undemocratic nature of an austerity package imposed to meet the demands of a multinational government.
But as Bob Kuttner writes in The American Prospect, this isn’t such a hard and dry issue:
On one level, Papandreou is simply weary of being the agent of his own country’s economic destruction at the hands of bankers. He also is tired of the political unpopularity that comes with the role of broker of austerity.
But more important, Papandreou is resisting a double-cross already being cooked up by the bankers. He is playing the one card he has: If the bankers walk away from the partial debt relief committed in principle at the recent EU summit, Greece will default. And Papandreou wants that decision to be made, knowingly, by the Greek people and not by technocrats.
Charles Dallara, negotiating on behalf of the bankers, agreed to a 50 percent reduction in the amount of Greek government debt held by banks (a “haircut”), but the bankers are already trying to take a much smaller loss by monkeying with the fine print. By varying the details of interest rates and payback periods, bankers could end up losing a lot less than 50 percent—and Greece could end up getting a lot less than 50 percent debt relief.
Bottom line, Greece could wind up right back in the austerity trap, where the more the Greeks tighten their belts to pay debt, the more the economy collapses under them.
Bankers have already quietly unloaded a lot of Greek sovereign debt to hedge funds, and it’s not clear what kind of losses hedge funds are willing to take.
Then there is the problem of Greece’s own banks and its pension funds, which hold nearly $70 billion of Greek debt, and also ordinary businesses in Greece that are reliant on bank credit. If an exception from the 50 percent loss is not made for Greece’s own banks, their capital will be wiped out. The deal is supposed to include new capital from the ESFS for Greece’s banks, but that is not a done deal either.
In the meantime, Greece is supposed to continue with its program of stringent austerity to reassure the bankers and Europe’s political mandarins. But with this latest deal negotiated last week, Greece’s bankers as well as its workers and street protesters began sounding alarms.
At some point, enough is enough, and if the terms turn out to be one more tightening of the noose, Greece could have less to lose by just defaulting. At least that is Papandreou’s not-so-tacit threat.
This, essentially, is what Prime Minister Papandreou is saying. If you want the Greeks to continue the belt-tightening, you cannot alter the terms of the deal by stealth.
By involving his countrymen in the decision, Papandreou turns himself from agent of foreign austerity demands into a leader of the Greek people. The referendum will be sometime this winter, after the true terms of the deal are clear.