Papandreou Calls For Referendum On Bailout

Embattled Greek prime minister Papandreou has found a way to stick it to the eurocrats in a most elegant manner: instead of continuing to serve as everyone's favorite whipping boy, he has decided it is time to let the Greek people themselves speak out on the future of their country. In a surprise announcement yesterday, he told parliament that Greece is to hold its first referendum since 1974 and that the population would be asked whether it wants to accept the conditions of the bailout plan or not.

The eurocracy is at its heart deeply undemocratic – if it were up to the 'technocrats' leading it, national subsidiarity would have long ago become a relic of the past and democratic interference with their plan to erect a socialist super-state would be kept to a bare minimum.

This can be seen by the fate suffered by previous referendums: when the Irish and French e.g. said 'no', respectively 'non' to the Lisbon treaty, the referendums were simply repeated to get the 'right' result. As Stalin once sagely remarked, it doesn't matter who votes for what anyway – what matters is who counts the votes. So far, the eurocrats have always gotten the results that they wanted, by hook or by crook. Lately this has become a bit more difficult, as evidenced by recent decisions of the German constitutional court, whose chief justice Andreas Voßkuhle even went as far as demanding a referendum for German citizens as well if the government wanted to cede any more of its fiscal sovereignty to the eurocracy in Brussels.

Greece is the cradle of Western democracy –  it is only fitting that it should upset the EU applecart by means of actually practicing it.

As Reuters reports:

Greek Prime Minister George Papandreou called an unexpected referendum on Monday on the EU bailout deal for his debt-ridden country, a move that could necessitate a snap election if a public angry with swinging austerity measures rejects the deal.

Pressured by his own lawmakers to share the heavy political burden of belt-tightening with other parties, Papandreou said he needed wider political support for the fiscal measures and structural reforms required by international lenders.

"We trust citizens, we believe in their judgment, we believe in their decision," he told ruling Socialist party deputies. "In a few weeks the (EU) agreement will be a new loan contract… we must spell out if we are accepting it or if we are rejecting it."

Analysts said holding a referendum was a baffling decision, given that the latest survey showed a majority of Greeks taking a negative view of the bailout deal.

Opposition parties reacted angrily, accusing Papandreou of looking for a way out for his embattled party by dragging Greece, which has seen violent clashes between protesters and riot police, through a lengthy period of political instability. The euro extended losses against the dollar after the announcement, tumbling more than 2 percent to a session low.

Papandreou, grappling with Greece's worst financial crisis in 40 years, had discussed holding a referendum but many people were shocked at the prospect of weary, disgruntled citizens being asked to decide whether to accept or reject the bailout.

"Mr. Papandreou is dangerous, he tosses Greece's EU membership like a coin in the air," said conservative opposition New Democracy party spokesman Yannis Michelakis. "He cannot govern and instead of withdrawing honorably, he dynamites everything."

New Democracy leader Antonis Samaras will visit President Karolos Papoulias on Tuesday to discuss developments and push for snap elections, party officials said.

Weekend polls showed most Greeks took a negative view of the decision by euro zone leaders last week to hand cashed-strapped Athens a second, 130-billion-euro bailout and a 50-percent write-down on its enormous debt to make it sustainable.

"I never expected Papandreou to take such a dangerous and frivolous decision," said Dora Bakoyanni, former foreign minister and leader of the small center-right Democratic Alliance party. "Tomorrow all the international media will say that Greece itself is putting the EU deal at risk."

Germany issued a statement saying the EU was working hard to put the second Greek aid package in place by the end of the year and had no comment on the referendum. EU leaders hammered out the deal last week, fearing the Greek debt crisis would speed to other euro zone countries and shake global markets.

"If there was to be a referendum, we may reasonably conclude that they may not accept the austerity measures. We may conclude that it will bring the pack of cards tumbling down," said Howard Wheeldon, senior strategist at BGC Partners in London.”


(emphasis added)

Indeed, it appears quite likely that Greece's citizens will reject the plan – and that would 'bring the pack of cards tumbling down' as the Mr. Wheeldon so colorfully put it. We would however note that rejection of the plan is not a dead certainty; once in the voting booth, people often change their mind, especially on emotive – and in this case quite frankly existential – issues.

Besides, as reported in the Austrian press yesterday, Greece has paid out some €8 billion in pensions to dead people, which represents one of the biggest pension fraud scandals ever. Someone apparently finally noticed that Greece had an outstandingly large number of citizens aged 100 years and older. The 9,000 pensioners in this advanced age group easily made Greece the most blessed place on planet earth in terms of its citizenry's longevity. 

Perhaps these dead pensioners can be motivated to vote in the referendum as well.


Markets and Credit Rating Agencies Unhappy

News of Papandreou unexpectedly opting for direct democracy met with a huge sell-off in the world's stock markets as well as a further weakening of the usual suspects among euro-area government bonds.

Credit rating agencies  likewise expressed their disapproval.

As Bloomberg reports:


Greece’s plan to hold a referendum on Europe’s bailout for the nation poses a threat to financial stability in the region, Fitch Ratings said.

The vote “dramatically raises the stakes for Greece and the euro zone as a whole,” Fitch said in a statement today, adding that it increases the risk of a “disorderly” default.

Greek Prime Minister George Papandreou late yesterday called for a referendum on Europe’s plan to contain the country’s debt turmoil. Austerity measures by the government to reduce the deficit have eroded Papandreou’s popularity and sparked a wave of social unrest, while a poll published Oct. 29 showed most Greeks believe the new bailout package is negative.

A rejection of the European Union-International Monetary Fund plan “would increase the risk of a forced and disorderly sovereign default and — whilst not Fitch’s central rating case — potentially a Greek exit from the euro,” Fitch said. Both scenarios “would have severe financial implications for the financial stability and viability of the euro zone.”

Greek, Italian and Spanish bonds fell today and the euro dropped 1.7 percent against the dollar. Europe’s Stoxx 600 Index plunged 4.2 percent.”


What's Greek for 'tough titties'?

This has definitely doused the recent show of irrational exuberance in 'risk assets' all over the world – nevertheless, we still believe that stock and commodity markets will eventually make one more rally attempt after the current shake-out concludes. Mind, this is just our personal judgment, based on an analysis of market internals and sentiment. As such it is only a probabilistic assumption that could easily be proved wrong.



Germans Find Some Money Lying Around


Economic news from Europe keep deteriorating – euro-area CPI for October has once again been estimated to remain stubbornly high at 3% ,  euro-area-wide unemployment has risen to a new high of 10.2% – in fact the highest since 1998, when this data series was first collected –  and economic confidence surveys as well es growth estimates keep retreating.

Alas, amid all the gloom, something positive now and then happens as well. It has turned out that Germany has 'found' € 55 billion lying around somewhere behind the big German sofa. For once the inefficiency of the bureaucracy has managed to produce a positive surprise.

Germany is 55.5 billion euros ($78.7 billion)richer than it thought due to an accountancy error at the bad bank of nationalised mortgage lender Hypo Real Estate (HRE), the finance ministry said.

Europe's largest economy now expects its ratio of debt to gross domestic product to be 81.1 percent for 2011, 2.6 percentage points less than previously forecast, it said.

The HRE-linked bad bank FMS Wertmanagement was set up after HRE was nationalised in 2009, so that HRE could transfer the worst non-performing assets to an off-balance sheet bank guaranteed by the German state.

"Apparently it was due to sums incorrectly entered twice," said a ministry spokesman on Friday, adding the reason for the error still needed to be clarified.

The government nonetheless welcomed the news which pointed to a further reduction of Germany's debt mountain, which remains above the European Union's Maastricht requirement for 60 percent of GDP.

However, the opposition Social Democrats (SPD) expressed astonishment at the extent of the accountancy error, for which they see the government as responsible.

"This is not a sum that the Swabian housewife hides in a biscuit tin and forgets," said SPD parliamentary leader Thomas Oppermann. "To overlook such a sum is completely irresponsible." Swabians, from the south-west of Germany, are renowned for their savings skills.”


(emphasis added)

You couldn't make this up. 'Entered an amount twice' by mistake? How can one make a mistake with such giant sums? Only bureaucrats manage to do that, given they never deal with anything but OPM (other people's money). Anyway, Germany's 'bad bank' apparently isn't as bad as was hitherto believed. Moreover, it is clear that all of Europe could use those 'Svabian savings skills'. Perhaps the Germans should send the money to Greece to help keep all those 100-year old pensioners afloat.

Euro Area Credit Market Charts

Below is our usual collection of CDS prices, bond yields, euro basis swaps and other charts. As always, both charts and price scales are color coded. Prices are as of Monday's close. News of the planned Greek referendum has created a bid for sovereign CDS, and they began to bounce on Monday. Likewise, the bonds of Italy and Spain kept selling off, leaving yields on Italy's debt close to breaking out to new highs.



5 year CDS on Portugal, Italy, Greece and Spain –  a bounce begins – click for higher resolution.



5 year CDS on France, Belgium, Ireland and Japan. Sovereign CDS are being reconsidered in the wake of Papandreou's announcement – click for higher resolution.



5 year CDS on Bulgaria, Croatia, Hungary and Austria – click for higher resolution.



5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – click for higher resolution.



5 year CDS on Romania, Poland,  Slovakia and Estonia – click for higher resolution.



5 year CDS on Saudi Arabia, Bahrain, Morocco and Turkey – click for higher resolution.



Three month, one year and five year euro basis swaps – still not much movement here – click for higher resolution.



Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) –  a big bounce in this index as well – click for higher resolution.



Inflation adjusted yields dip again – they have not truly confirmed the big rally in stocks and industrial commodities anyway – click for higher resolution.



10 year government bond yields of Italy, Greece, Portugal and Spain – Italian yields are close to breaking out. Where's Mario? – click for higher resolution.



10 year government bond yields of Austria, UK Gilts and the Greek 2 year note – click for higher resolution.


Italy's 10 year government bond yield, long term  – at 6.334% is has actually achieved a breakout to a new high today. The euro area rescue project is evidently already failing – click for higher resolution.



Portugal's 10 year government bond yield, long term. This remains a bullish chart – click for higher resolution.



Spain's 10 year government bond yield, long term. A false breakdown reversed – this strikes us as bullish (for the yield – bearish for Spanish bonds) – click for higher resolution.



5-year CDS on Australia's 'Big Four' banks –  a small bounce on Monday – click for higher resolution.



5 year CDS on China's government debt, long term. Still following European CDS spreads, oddly enough – click for higher resolution.



The S&P 500 reverses course and corrects its recent advance. Note though that volume on the decline is fairly small – a sign that another rally attempt is likely to occur – click for higher resolution.



Germany's DAX index is as usual far more volatile, gapping down in the wake of Papandreou's announcement – click for higher resolution.






Charts by: Bloomberg,



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4 Responses to “Euro Area: Democracy To Interfere With Financial Engineering”

  • Floyd:

    Do you recall the outcome of the last Irish election?
    Fine Gael was elected by the people, upsetting the 60 years (or so) status quo, based on the promise to renegotiate the freshly signed conservational bailout agreement.
    But, to no avail. It does not seem as Fine Gael leadership make much good on their promises.

    Will Greece turn out different?

  • I think we have a case where fiction is stranger than truth. As you say, “you can’t make this stuff up”. Being that accounting is done on a double entry, I beg the question as to how an error of this type could be made by a competent person. The counter entries would have to be made. This means the counter entries are missing from some other entity or asset/liability-capital account. Otherwise, they are using a system of accounting that doesn’t pass the smell test. Best guess is they went from a mark closer to reality to a mark to fantasy valuation.

    There are a lot of things being blamed for this current market turmoil. CNBS continues to parade bulls on the scene to talk about PE ratios that are clearly unsustainable in light of the credit bubble that has produced earnings not seen since 1929. How much of these valuations are due to accounting as used at the bad bank in Germany? Isn’t the real problem that there isn’t any valid accounting being used around the world, thus where is the next big surprise? I have written a couple of posts on my blog titled, they have all been sucked dry and I plan to write another when I figure out where I left off. But, clearly we are looking at entire countries that have been sucked dry for years and have employed ponzi finance to keep going. Their creditors are the ones that have created the ponzi, using double entry book keeping and rules that allowed for lending without capital reserves. The collateral? Eaten olives.

    • I’m soon going to write about the valuation question again (I have talked about it a few times in the past). Apart from the question whether the accounting profits are trustworthy (how can they be when US true money supply has increased by 51% since early 2008?), p/e ratios have a habit to contract a lot more during secular contractions.

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