Can Merkel and Sarkozy save their euro debt deal tonight?

11/02/2011 12:30 pm EST


Jim Jubak

Founder and Editor,

Can Angela Merkel and Nicolas Sarkozy talk Greece in from the ledge?

That’s the challenge ahead of the meeting the German Chancellor, the French President, and Christine Lagarde, managing direction of the International Monetary Fund, will have with Greek Prime Minister George Papandreou tonight. Papandreou walked Greece and with it the entire EuroZone out onto that ledge yesterday with a call for a vote of confidence on his government on November 4 and then a referendum that would let Greek’s vote the recently concluded Greed debt rescue plan up or down sometime after that. (Sometime might be as late as January.)

Yesterday global financial markets sold off on fears that Papandreou’s surprise move, a last ditch scheme to save his government in my opinion, would kill last week’s grand plan for ending the euro debt crisis before EuroZone leaders even had a chance to fill in all the missing details.

Today, on sober reflection, the chaos that Papandreou could unleash looks even worse. (Although both European and U.S. stock markets are up today on hope, I’d guess, that Merkel and Sarkozy can find a solution before the G20 meeting that starts tomorrow.)

How much worse is it?

The International Monetary Fund won’t sign off on the next round of rescue cash needed in November to prevent Greece from running out of money to pay pensions and government salaries—unless the Greek government has approved a new budget and signed off on the euro deal. (IMF rules say that it needs to see a 12-month funding plan in place before it can hand out cash.) No government—if Papandreou’s government falls in Friday’s no confidence vote—no budget and no sign off on the euro deal.

If Greek approval for the euro deal gets put off until a referendum, which could be as far off as January, that additionally endangers the December payout of rescue cash that Greece needs to pay interest to bond holders. If that money weren’t forthcoming that would mean Greek default that would trigger payments in the credit default swaps market.

Without Greek approval of the euro debt deal forget about using a special purpose investment vehicle to increase the firepower of the European Financial Stability Facility. No investor is going to step up in a situation with that much uncertainty.

Without Greek approval of the euro debt deal, negotiations with banks on marking down the value of Greek debt by 50% in exchange for some package of new bonds, guarantees, and cash will grind to a halt. How to you formulate a debt reduction deal if there’s no Greek negotiator at the table with the power to strike a deal?

Uncertainty piles on uncertainty. It’s not clear that Greek President Carolos Papoulias would call for a referendum if asked by Papandreou. Nor that Greeks would vote in numbers to push participation above the 50% threshold. Papandreou’s opposition has started to talk of boycotting the vote. And what would the question be exactly? Vote yes on the details of the deal? Vote yes on staying in the euro? Opinion polls give scant chance of winning. The second gets a 70% favorable rating.

And you thought the euro debt deal announced last week was full of unknowns?

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