Bravo Papandreou!

ROBERT KUTTNER 
NOVEMBER 2, 2011
http://www.prospect.org/article/bravo-papandreou

The Greek prime minister takes the country's fate out of
the hands of the bankers.

Greek Prime Minister Georgios Papandreou startled Europe
and the financial world Monday by announcing that he will
be calling a referendum on the terms of the latest deal
negotiated by European leaders and bankers.

What is the Greek leader up to?

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.

Here is what's happening behind the scenes.

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.

Even if bankers and hedge funds do take the full 50
percent loss as advertised, the European Central Bank and
the International Monetary Fund, which together hold about
one third of Greece's roughly 350 billion euro Greek debt,
expect to be paid in full. The official agencies are set
to help Greece in other ways, by advancing the Greek
government additional funds through the new European
bailout agency, the European Financial Stability Facility
(EFSF). But this is ... still more debt on terms yet to be
defined.

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.

One can assume that the panic that rippled through
Europe's financial and political circles was about what
Papandreou intended. I am reminded of a poem by e.e.
cummings about a conscientious objector named Olaf, which
includes the epic lyric, "There is some shit I will not
eat."

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.

Polls taken over the weekend show that some 59 percent of
Greeks oppose what appear to be the terms of the latest
deal, but over 72 percent want Greece to stay in the
eurozone.

If the International Monetary Fund, European Union, and
European Central Bank are as good as their word and hold
the bankers to the terms that were negotiated, we can
expect Papandreou to urge Greek citizens to ratify the
bargain. If, on the other hand, political and financial
elites try to wriggle out, then the Greek people can draw
their own conclusions--and we will all be in the uncharted
waters of a likely default by a eurozone country.

In the meantime, Papandreou is showing real leadership. It
is about time someone stood up against the banker-led
austerity consensus. Greece, after all is the cradle of
democracy--and Papandreou is a socialist.

Despite its past sins of inefficient bureaucracy, Greece
is the underdog here. In return for inflicting hardship on
its own people, the Greek government deserves some real
relief to allow its economy to grow again. But that's not
the kind of game bankers play when they are permitted to
get away with it.

Greece now has the desperation power of the weak.
Papandreou's is a brave, nervy, high-stakes move, and one
that deserves our respect.

___________________________________________

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