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Greeks and the Gift Horse

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We may be forgiven for wondering whether the Greek capacity for self-destruction knows any bounds. The terms of a bailout for the highly indebted economy were agreed last week by Eurozone leaders. The Greek PM, George Papandreou, has now announced that the bailout is to be put to a referendum. The bailout does, of course, come at a price and we have all witnessed the scenes on the streets of Athens as the protesters oppose the austerity measures needed to put the Greek economy on track within the Eurozone. There is a realistic chance that voters will reject it.

The priest Laocoön counselled the Trojans not to trust the Greek offering of the wooden horse: “timeo Danaos et dona ferentes”. The Greeks now seem equally fearful in the face of the bailout package being proffered to them. Perhaps there is some justification? To accept the bailout will lead to a centralisation of fiscal control representing a significant loss of sovereignty. Voters may take the view that it would be better to reject the help and, instead, simply default leading, we assume, to abandoning the Euro and devaluing the reintroduced drachma.

The markets are now responding to the real possibility that the bailout terms will be rejected and Greece will default. After posting strong gains in October, the key European markets are taking a dive today with the Italian market leading the plunge and both the German DAX and the French CAC down by over 4% at the time of writing. Eurozone banks have been particularly hard-hit: instead of the (reluctantly) agreed 50% “haircut” on Greek sovereign debt, banks could now be facing even bigger losses.

The spectre of an Italian, or even Spanish, default is looming once again following this development in Athens. It will take strong action to calm markets ahead of a Greek referendum which, even if the bailout is ultimately accepted, seems destined to overshadow markets over the coming weeks.