Greece will hold a referendum about the newest European aid package, Prime Minister George Papandreou announced on Monday. “We trust citizens, we believe in their judgment, we believe in their decision,” he told ruling socialist party lawmakers.
Nearly 60 percent of Greeks view Thursday’s €130 billion bailout agreement as “negative” or “probably negative,” according to a survey released on Saturday.
At a summit last week, European heads of government agreed to continue financial support for Greece and forgive 50 percent of the nation’s debt. The second bailout package comes after the €110 billion committed last year proved insufficient to steer the troubled country off the brink of bankruptcy.
With more than €340 billion in debt, Greece is among the least creditworthy of nations. Nearly one out of ten Greek workers is unemployed and its economy is expected to contract by as much as 5 percent this year. The lack of expansion, caused by a dramatic drop in consumer spending, is accompanied by higher taxes which are extremely detrimental to private-sector growth.
Many Greeks blame their government and other euro nations for imposing heavy austerity measures on them. The specter of default does not appear to have engendered a particular willingness on the part of the Greek people to reform. Reining in the pervasive Greek state is unpopular as is international “support” which a majority of Greeks perceive as punishment.
The outcome of a popular vote on the latest rescue package is far from certain however. 72 percent of Greeks want to stay in the currency union. If a rejection of the second bailout agreement could imply a eurozone exit, a majority may be willing to bear the burden of further budget cuts.
If Greece were unable to repay all of its loans despite the attempted rescue, it would probably not renege on its obligations to other members of the euro area, thus forcing private bondholders to accept even bigger losses. Investors could then fear similar partial defaults for other heavily indebted European countries as Italy, Portugal and Spain and drive up their borrowing costs, forcing their government to tap into the temporary bailout facility which might not be big enough to finance Italian and Spanish deficit spending for a prolonged period.