Analysis: ‘Papandreou may have done the eurozone a favour of sorts’

THE reckless act of a madman? Or a course that may liberate Greece and set Europe free? The shock decision of Greek premier George Papandreou to hold a referendum on the country’s bail-out package sent shockwaves through world stock markets.

Germany’s Dax Index tumbled 5 per cent, France’s CAC 40 by 5.4 per cent, Italy’s by 6.8 per cent while the FTSE 100 Index lost 2.2 per cent.

Of greater concern were the huge markdowns suffered by leading European banks.

Commerzbank dropped 10.7 per cent, BNP Paribas lost 14 per cent, Societe Generale tanked by 16.9 per cent.

Deutsche Bank was 10.3 per cent down and Barclays by 10.5 per cent. RBS, humbled on Monday, lost 8 per cent to 22.23p.

The Greek announcement blows apart last week’s complex Euro summit debt package and opens the prospect of a disorderly default and Greece’s exit from the Euro.

“The EU hardly has a Plan A”, said Gary Jenkins, head of fixed income at Evolution Securities yesterday, “so if that gets rejected there really isn’t a Plan B to turn to with regard to Greece. They may be able to tweak the arguments here and there, but a wholesale new approach to the Greek problem is very unlikely”.

Markets reeled at a prolonged period of uncertainty while a referendum is held in January. By that time the flight of capital from Greece and Italy could have turned into a deafening roar – and the prospect of a ‘No’ vote triggering a collapse of the government, an immediate bond default – and a disorderly exit from the eurozone, weakening in the process the mortar holding Portugal and even Italy in place: the nightmare scenario global markets have been dreading.

The referendum is a devastating blow to the euro rescue deal. Deep sceptics had put the chances of the package surviving scrutiny at two weeks. Few had bargained on such a torpedo within a few days.

Given the severity of the austerity plan and the angry mood in Greece, winning support for the deal will be hugely difficult: the words turkeys and Christmas spring to mind.

But the country’s middle class will baulk at seeing its savings wiped out, others may see it as a matter of national honour – and many will have no appetite for leaving the euro in chaotic circumstances.

But here Papandreou may have done Greece – and the eurozone – a favour of sorts. There is currently no prospect of any economic recovery ahead for Greece. The debt burden will increase, not diminish, under austerity.

Leaving could be messy and traumatic. But by allowing a reborn Greek drachma to fall against other currencies it would improve the country’s export prospects and her economy. It would give hope.

The eurozone, meanwhile, would be shot of a debt millstone. Papandreou now faces a confidence vote on Friday. And with six members of his party seeking his resignation, an early election – or a government of national unity cannot be ruled out.