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SH – 02 November 2011: Where does the Greek referendum leave the eurozone?

- Keith Wade

Greek Prime Minister George Papandreou stunned markets with his call for a referendum to approve the package agreed in Brussels last week...


Keith Wade
Chief Economist and Strategist

 

 


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    For professional investors and advisers only.This document is not suitable for retail clients.


    – It is possible, but unlikely, that the referendum will be called off.
    – The more likely prospect is that the current government goes on to hold a referendum in January. That means a period of uncertainty where the markets will have to focus on Greek opinion polls and politics.
    – The risk of Greek PM Papandreou losing the referendum and then a subsequent election is high.
    – In our view last week’s bailout package was always likely to fail. Nonetheless, we did not expect it to face such a sudden death.

    Greek Prime Minister George Papandreou stunned markets with his call for a referendum to approve the package agreed in Brussels last week. Equally surprised were his European Union partners, with both Berlin and Paris saying they had no warning that this was coming.

    Papandreou has now been invited to dine with Chancellor Merkel and President Sarkozy this evening to discuss the Greek debt problem ahead of the G20 meeting. The idea of taking a leaf out of his finance minister’s book and checking into a clinic with “stomach pains” must seem quite appealing to the Greek PM.

    The question now is: what is the road map for the eurozone?

    It is possible, but unlikely, that the referendum will be called off; it is not a popular move and the government could lose the vote of confidence on Friday which would trigger a general election. Alternatively, the G20 could lean on Papandreou to reconsider, but this might be seen as interfering with the sovereignty of Greece.

    The more likely prospect is that the current government survives the confidence vote and goes on to hold a referendum in January. That means a period of uncertainty where the markets will have to focus on Greek opinion polls and politics. Current polls suggest the Greek people would vote against the EU package, but in favour of remaining within the euro. Unfortunately that may not be
    the choice, with many in the EU seeing continued membership of the euro as conditional on acceptance of the package.

    An important key to the outcome will be the position of the opposition. At present they oppose the package and have said they would renegotiate. Should this change, with say the formation of a national unity government, the prospects for a positive referendum result would be increased. Such unity seems unlikely at this point however, so the risk of Papandreou losing the referendum and then a subsequent election is high. There then follows the risk of a stand off between Greece and the EU, with the possibility of the euro losing one of its members.

    In the meantime, the EU is set to work on fleshing out the details of the agreement reached last week. However, progress on bolstering the EFSF and banks’ acceptance of haircuts will have to be made conditional on a positive referendum. More immediately, there are questions on whether the IMF will disburse the €2.2 billion tranche of the current aid package in mid-November if the new aid package is in doubt.

    The outlook was not particularly clear even before the latest developments and we had expressed a number of concerns about the bank recapitalisation and the leveraging of the EFSF. In our view the package was always likely to fail as, even with unrealistic growth assumptions, it left Greece with a debt/ GDP ratio of 120%, which is still too high. Further restructuring of Greek debt was therefore inevitable. Nonetheless, we did not expect last week’s package to face such a  sudden death.


    Disclaimer:

    The views and opinions contained herein are those of Keith Wade, Chief Economist and Strategist, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

    For professional investors and advisers only.This document is not suitable for retail clients.

    This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.


     Source: IFAWorld – Schroders

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