Markets slump on news of Greek bailout referendum

STOCK markets across Europe have slumped this morning following the shock news that Greece is to hold a referendum on whether to accept the rescue package agreed last week by the European Commission, the European Central Bank and the International Monetary Fund.

Because the package involves strict austerity measures, it is thought likely that the Greek people will reject it. As a result, a Greek default, and the country’s departure from the eurozone, appear inevitable.

Greek PM George Papandreou, announcing the referendum, said: “The command of the Greek people will bind us. Do they want to adopt the new deal, or reject it? If the Greek people do not want it, it will not be adopted.”

Even though Papandreou will urge Greeks to vote for the package, Benedict Brogan in The Daily Telegraph writes this morning: “The worry is that the command of the Greek people to the EU might be to go stuff your austerity measures. Opinion polling shows that the Greek people are firmly against the package, a point underlined by the newspaper cartoons of Nazi-styled Germans forcing their medicine on Greece.”

The effect on stock markets of Papandreou’s gamble was immediate. The FTSE-100 was down 2.4 per cent at just above 5,400 points by 8.40 am. The German DAX was down 4.3 per cent and in Paris the CAC fell four per cent. In New York, Dow Jones futures fell 1 per cent, suggesting a fall is likely when trading opens.

French banks have been particularly hard hit. Having rallied last week after EU leaders and banks agreed to write off half Greece’s debt as part of the rescue package, they have now lost everything they gained. Societe Generale was down more than 13 per cent at one stage this morning.

Andrew Lim, banking analyst at Espirito Santo in London, is quoted by The Daily Telegraph as saying: “If Greek voters reject the unpopular bailout plan it could result in a ‘hard default’, which could force banks to take losses of about 75pc on their Greek sovereign bonds, trigger payouts on credit default swap insurance contracts, and raise the threat of a systemic risk.”

Business Insider makes the point that “Italian yields were blowing out once again” and concludes: “So, seriously, what does Europe do now?”

The only ray of hope is that the Greek referendum question is framed in such a way that the Greeks might actually vote FOR the package. As The Guardian points out, “We don't know exactly what question will be put to the Greek people. That could be crucial...”

If Greeks are simply asked whether they agree with the latest bailout for the country, and the painful austerity measures it engenders, then it will likely be rejected.

But if the question can be framed in such a way that it becomes a vote on whether Greeks want to remain in the euro, then it is possible that the rescue package will be approved.

Says The Guardian: “Many are hoping that at the end of the day the ‘silent majority’ of Greeks - those who want to see the country modernised and the economy regain competitiveness - will rally so that the referendum is passed with a resounding 'yes’.” ·