News reports say that Greek Prime Minister George Papandreou will resign. His political demise was precipitated by the revolt led by his finance minister, Evangelos Venizelos. The breakaway group is against a referendum on the EU bailout package.
Mr Venizelos said Greece’s position within the euro ‘cannot depend on a referendum’. Following his move, the deputy finance minister, the health minister and the development minister also spoke out against holding a referendum.
According to the BBC, “Mr Venizelos also said that the next 8bn euros (£7bn) of European Union bailout aid should be released immediately.” The appeal emphasized just how close to the brink the institutions which were formerly deemed “too big to fail” actually were.
Update: There are now reports the Greek Prime Minister has reversed his position of moments ago. He is not resigning and has changed his mind about calling for a referendum.
In another surprise in a week of shocks, European Central Bank governor Mario Draghi cut interest rates in a bid to keep the European economy chugging along. Bloomberg says, “the European Central Bank unexpectedly cut interest rates as Italian and Spanish borrowing costs soared after euro-area leaders raised the prospect of Greece exiting the monetary union.”
Nick Kounis, head of macro research at ABN Amro in Amsterdam says, “the decision is the right one. There will be further rate cuts going forward. The European economy is probably already in recession and events over the past days have significantly increased downside risks.”
But if the wider European economy was weak, the situation in Greece was probably critical. The chief investment of ABN Amro warned that instability could lead to a Greek bank run. The effects of a departure of Greece from the Eurozone — which Merkel posed as the alterative of accepting the bailout package — was fraught with unknowns according to Daniel Knowles of the Telegraph. He wrote that “even an organised effort to pull out of the euro could cause a monstrous, unprecedented, Europe-wide financial crisis.” Knowles quotes a UBS research note which examines the consequences for Athens.
We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year. … It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.
Knowles argues that Merkel’s ultimatum to Greece was ultimately a continent-wide suicide pact. “Whatever happens, [Germany and France are] going to bail out Greece – this is just posturing over the terms”. If the Greeks refuse to proceed with the referendum and accept the bailout package the crisis will not be long in returning with redoubled force. But if they go forward with the referendum and voters reject the fatal funds then the crisis will be upon them almost immediately.
The financial Doomsday Machine is counting down to its last moments. For good or ill, the time to find out either what happens when the clock ticks down to zero or cutting the red or blue wire has come. The EU has tried for some months to shut down the unanticipated workings of their own creation. But now it’s time to cut or run. The furious gyrations that are now on full display are either the frenzied efforts of those caught in a trap desperately seeking a way to escape or the manifestations of incompetence which lay under the placid surface.