By: Dr. Mike Campbell
A week ago, markets across the world were putting on substantial gains and the Euro was strengthening on the news that EU leaders had put together a package which would allow for an orderly Greek default and provide confidence that the banking sector would be able to weather any storm that might happen. Of course, the huge debt burdens saddling many of the region’s economies would not disappear overnight, but like a young man waking up from one hangover too many, politicians of every shade have resolved to take a more mature view of debt going forward.
However, the euphoria was short-lived as Greece announced that it would put the EU deal (which called for further austerity measures for the Greeks) to a referendum. The deal called for the establishment of a €1 trillion fund to ensure the fortunes of indebted EU states and the financial sector and feelers were going out to China to see if it would be willing to invest in the fund (the idea that it would “contribute” has always been disingenuous). However, China ha made it clear that it will do no such thing whilst the issue of the Greek referendum remains on the horizon.
President Sarkozy and Chancellor Merkel must have been privately fuming at Greek PM Papandreou, but their public utterances have been suitably diplomatic. However, Germany and France have made it clear that none of the EU/IMF bailout funds will be released to Greece until the outcome of the referendum is clear. This could entail a default on Greece’s debt in the interim. The plebiscite, rightly or wrongly, is being seen as a vote on whether or not Greece wants to remain in the Euro. It looks as if the vote will take place on the 4th of December, so confusion is set to reign for another month at the least.
The G20 leaders are meeting in Cannes today and the issue of the sovereign debt crisis within Europe and the latest Greek drama are set to dominate. In the modern world, no first world nation can default without it having much wider repercussions – when that nation is part of the world’s largest single currency block, the consequences of such a situation are even more dire.