Now for Act 3....

Last week, the European "comprehensive" package of bailout measures for Greece, the European banks and everything else, was touted by the French and the Germans as the final answer to those doubters who feared that the Eurozone members would never be able to get their act together and agree on anything.

The headline numbers seemed big, at 1 trillion Euros for the leveraged bailout fund (although not as large as the pre-announcement rumours had suggested), and 110 billion Euros or so in new capital for Europe's banks. At the same time, the willingness to acknowledge that Greece is indeed bankrupt and that a default is inevitable, seemed to highlight a new sense of realism, as illustrated by the acknowledgement that a 50% write-down of the face value of Greek debt would be appropriate.

All this helped to boost markets hugely last Thursday. Those sitting on lots of cash were feeling extremely uncomfortable since they were not participating.

However, as so often in the past, a more detailed reading of the terms showed up the usual lack of Eurozone clarity and the presence of plenty of Eurofudge. Exactly how the 1 trillion EFSF is going to be funded seems open to question and reliant on extensive use of derivative products sold to foriegn sovereign wealth funds. Not surprisingly the latter have been decidely luke-warm in their response. The 110 billion in new capital for European banks looks too low, whilst the question about where the new funds will come from also remains unclear.

All this has been followed up by last night's surprise announcement by the Greek government that it is now offering a referendum to its people on the terms of the latest bailout. This laudable exercise in democracy comes at the worst possible time, and takes the whole Eurozone debt crisis into a new realm of uncertainty and worry: if current opinion polls are to be believed, 60% of the Greek voting public would vote against the package.

Clearly a "No" vote would trigger a disorderly Greek default, would represent the death knell for Greece's banks and, most probably, the country's continued involvement in the Euro, along with much else besides. One hopes that the Greek government will be able to get this message across to the voters before the actual vote is held sometime in January.

This then begs the question: why hold a referendum at all? Europe has hardly been a model for democratic affirmation over anything EU related in recent decades, so why start now?

Obviously the poisonous mix of domestic Greek and international Eurozone politics proved too much for the Greek government, faced as it is with increasingly violent street protests and a cratering economy. Maybe this gambit represents the last move in a Greek attempt to extract better concessions from its European paymasters (viz. the Germans). If so, we are now faced with the prospects of seeing which side blinks first: a modern day sword of Damocles.

The European crisis looks as though its going to keep running for a while...

Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186

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