Tuesday, November 01, 2011

How to bring about the collapse of a government

Greek prime minister appears to have rolled the proverbial dice, and the results were not at good. As the New York Times reports, his decision to call for a referendum on whether the nation should accept the debt deal recently worked out by multiple European nations could lead to the collapse of the government.
Analysts said that Mr. Papandreou’s call for a referendum was a last resort, meant to gain broader political support for the unpopular austerity measures in the deal without forcing early elections that would only worsen the country’s political and economic turmoil.
But after weeks of mounting pressure, one Socialist lawmaker quit the party to become an independent, reducing Mr. Papandreou’s majority to 152 seats out of 300 in Parliament, and another six Socialists wrote a letter calling on Mr. Papandreou to resign and schedule early elections for a new government with greater political legitimacy. Together, the developments made it doubtful whether his government would survive a confidence vote planned for Friday.
Reuters adds that the potential collapse of the Greek government is just one of the problems that could develop if Mr. Papandreou's idea moves forward

Whether or not a plebiscite takes place, and whatever the result, Papandreou's gamble guarantees long weeks of political uncertainty just when the 17-nation currency area was desperate for a period of calm to implement remedies agreed last week.

It will make it harder, if not impossible, to restore investors' confidence in most euro zone government debt in the short term and to lure Chinese and other wealth funds to pour billions into European sovereign bonds.

That may force the European Central Bank to get more deeply involved in crisis interventions to steady bond markets, just as Italy's Mario Draghi takes the helm of an institution yearning to return to its prime mission of inflation-fighting.

The immediate market backlash, with Italian and Spanish bond spreads widening close to their crisis peaks and the euro falling more than 2 cents against the dollar, underlined the heightened risk perception among investors.
It appears Mr. Papandreou made his decision without alerting or consulting with other European leaders, some of whom will meet on Wednesday in an effort to rein in a crisis that could quickly spiral out of control. And in doing so he is throwing world markets into uncertainty (not to mention almost certainly sealing his political fate).

No comments: