Is Greece About to Derail the Bailout Yet Again?

Germany found it hard to conquer and control Greece in World War II. History seems to be repeating itself.

After Greek Prime Minister Papandreou’s inspired gambit of a national referendum to approve the latest bailout pact was beaten back by an ugly combination of betrayal by his finance minister and bullying by the IMF, Merkel, and Sarkozy, the sad farce of the Eurorescue seemed to be back on track. The endgame is clearly default for Greece, or in lieu of that, a deeper restructuring down the road. In the meantime, the country is being driven into the dirt as a perverse showcase of the creditor sovereignity. Public services of various sorts are falling apart, young people who cannot find jobs are emigrating, suicides are skyrocketing. And the country now is running a trade primary budget surplus, which means default and abandonment of the euro is a viable option. And as we and other commentators have observed, Greece is only one of the many probable points of failure in the latest rescue scheme.

But foreign effort at containing Greek politics may be failing. Even though Papandreou survived a vote of confidence on Friday, by Saturday, his coalition was fracturing. Per the Financial Times:

George Papandreou’s chances of putting together a strong coalition government that could persuade international lenders to unblock fresh funding for Greece have faded after the conservative leader bluntly rejected his proposal.

Antonis Samaras said on Saturday his New Democracy party would not join a new government that would lack a clear mandate. He repeated his call for immediate elections.

Analysts said that without the support of Greece’s largest opposition party, Mr Papandreou would be unable to secure the disbursement of a desperately needed €8bn loan tranche, exposing the country to the risk of a disorderly default by the middle of December.

The New Democracy Party contends that elections could be held before the mid-December drop dead date for getting the next €8 billion infusion. Failure to receive funds by then mean both default and and bouncing checks to government employees. And while New Democracy says polls are necessary to demonstrate popular support for the deal, a survey conducted in Athens found that the public would prefer a coalition government to elections. (Note that one of my Greece mavens said polls there are not as reliable as in the US, so you may need to take this finding with a bit of salt).

The New York Times argues this may just be grandstanding. Perhaps, but if it goes on for even a few days, the markets will not by happy. And with Italian government bond yields at over 6%, the stakes are much bigger than Greece. From the New York Times:

While such stands may be nothing more than clever negotiating strategies to win concessions, any sign that Greece may be headed for a poisonous stalemate is sure to rattle other European leaders — and creditors — craving stability….

But as the dust settled Saturday, it was still unclear whether Mr. Papandreou’s referendum gamble was a brilliant strategy to hasten passage of the debt deal, which is Europe’s best hope to create a firewall around Greece, or whether it achieved a short-term political gain while dooming the government’s ability to work with opponents to approve the agreement.

It dictates the approval of a series of austerity measures the government has already agreed to and imposes a permanent foreign monitoring presence. Amid growing social unrest, the Socialist government might not have the ability to pass the necessary legislation on its own, hence Mr. Papandreou’s appeal for broader consensus.

I must be a bit dense, but I don’t see how any other vote save on a referendum would be tantamount to a show of public support for the deal. Even when big issues are looming, people vote for parties and particular politicians for all sorts of reasons. The New Democracy Party has said it favors the deal, but its leader, Antonis Samaras, also made a statement tantamount to saying some of its targets would need to be revised. The stance of the international coalition is that this deal is take it or take a hike.

This may all prove to be a weekend drama that blows over. The two camps meet tomorrow. But the Times says failure to patch things up means early elections. Stay tuned.

Update 11:00 AM: Reader Alexander Goy caught the embarrassing error (see strikeout above). Another function of overhasty drafting. I did this post while cross posting the outsourcing post, and somehow the two bled together. The funniest example I had of that was about 15 years ago, when I did a client project that included a simply insane amount of travel (5 continents in 8 weeks, with the trips sequenced in the worst imaginable manner, for instance, London-Seoul-Lisbon) for JV partner interviews. Caracas was the only port of call in South America. When I wrote the report, I played music while I was working, including Evita. Thank God I submitted a draft to some friendly people at the client. One guy wrote, “This is all really good, except what is this about Argentina?” Needless to say, I no longer play music with lyrics while drafting.

This post originally appeared at naked capitalism and is reproduced with permission.