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With Debt Fix in Danger, Is it Europe’s ‘Lehman Moment’?

November 1, 2011 at 12:00 AM EDT
World markets were shaken Tuesday by new fears that the European debt deal might come unglued. Jeffrey Brown discusses the move with a reporter in Athens and a market analyst.

JEFFREY BROWN: A short time ago, I spoke with John Psaropoulos in Athens. He’s a freelance reporter and writes the blog called The New Athenian.

John, welcome.

We said this was a surprise. Apparently it was even a surprise to people in the prime minister’s cabinet and party. So what’s known about why he suddenly decided to call for a referendum on the plan?

JOHN PSAROPOULOS, freelance reporter: At the moment, the prime minister hasn’t explained his thinking, other than what he said in Parliament to his M.P.s yesterday, which was that the country had to move for on a democratic basis, it had to have hope for a better day after the austerity period was done, and that in order to achieve this he wanted his government to have the authority of a popular vote of approval for what was going to be the last phase, I presume, of the austerity measures that have been so painful up until this point.

JEFFREY BROWN: So it caused an immediate firestorm there, with a lot of opposition even within his party. Tell us what’s happening now. Is his power threatened at this point?

JOHN PSAROPOULOS: Well, at the moment, the prime minister’s power seems to be slipping — 24 hours after his announcement to have the referendum the entire opposition — that means left-wing and right-wing parties — have said they will not back this decision. People have expressed stupefaction.

And he has had three defections within his own party, which now puts him at 150 M.P.s, were his government to come to a vote of confidence on Friday as scheduled. That means that if every party shows up to Parliament for that vote of confidence at the end of the week, and given the stated position of the opposition parties not to back the government at this point because they disagree with the eventual referendum in January, then the government probably doesn’t have the M.P.s from its own side in order to survive that vote of confidence.

JEFFREY BROWN: Now, what kind of gamble is he making? If it’s a gamble to try to seek political cover, what do the polls tell you now about how Greeks feel, whether they would support such a referendum?

JOHN PSAROPOULOS: At the moment, it’s difficult to say, because the latest opinion polls that have been published were taken before the present crisis erupted.

And, yes, 70 percent of Greeks did say in an opinion poll taken on Friday after the latest deal was reached in Brussels for a $100 billion bailout which is Greece’s second bailout, and published on Sunday, that they would rather have Greece remain within the euro and presumably with all the pain that that involves, rather than go back to the drachma.

And 54 percent expressed themselves in favor of a referendum, rather than a parliamentary vote. But at the same time, it doesn’t seem to have gone well in terms of the government’s thinking or the prime minister’s thinking, which is namely that it seems to be that the government will seek to re-legitimize itself and re-bolster its authority through the one issue on which Greeks seem to be united, which is that they want stability to remain within the euro and a sense of continuity, rather than some sort of disorderly default.

It seems that the government misjudged that this would be an issue that it could carry itself forward on in a January referendum, at least because it’s too far away for that issue to remain in hiatus. The European summit was called in order to bring certainty and stability. And this now reopens the issue and puts it in jeopardy.

JEFFREY BROWN: All right, John Psaropoulos in Athens, thanks so much.


JEFFREY BROWN: And just after that conversation and after the markets closed, I spoke with Nariman Behravesh, chief economist with IHS, an economic and industry forecasting firm.

Well, Nariman, welcome back.

Clearly most Greeks were taken by surprise and investors as well. Why the strong reaction? Take us through that.

NARIMAN BEHRAVESH, IHS Global Insight: Well, markets hate uncertainty.

And as John was saying earlier, this call for a referendum by the Greek prime minister has added a huge amount of uncertainty as to the outcome of this very tortuous process about resolving Greece’s debt and hopefully making progress on the whole eurozone sovereign debt problem. So, all of a sudden, it’s like it’s thrown a monkey wrench into the works.

JEFFREY BROWN: What is the concern about how the problems in Greece kind of spin out to the rest of Europe and then affect the world economy? Remind us how that works.


Let’s say the Greek public says no to this agreement. Then the question is, does Greece stay in the eurozone? Does it leave the eurozone? So Greece on its own is not that big. But then questions start to come up about, what about Portugal? What about Ireland? What about Spain? And what about Italy, which is a huge country?

So that’s where things start to spin out of control. And that kind of a crisis of confidence, if you will, could be very problematic, not just for Europe, but for the world economy, including the United States. So that’s a situation that some people have referred to as Europe’s Lehman moment, of course, referring to the collapse of Lehman Brothers in September of ’08 and all the problems that ensued from that.

JEFFREY BROWN: Well, you know, last week, there was euphoria, even though — and we talked about it on the show, our viewers will remember — even though we knew there were many details that were not all very clear at all. And then there’s a big reaction to something like this today.

Are the markets — I mean, an outsider would think, what’s going on? Are they overreacting one way one day and the other way another day? Is it all just very skittish markets?

NARIMAN BEHRAVESH: Well, the markets are clearly worried in the sense that a lot of the economic news out of the U.S., even out of China today, was a little iffy. It was a little weak. And so the markets are worried about, is the U.S. headed for a recession? Is China headed for a real slowdown?

So that worry is there. That is sort of the backdrop. But then on top of that, you add this bombshell, if you will, and I think that was enough to send the markets sort of into a bit of a tailspin today.

JEFFREY BROWN: And you’re saying that if this referendum doesn’t happen until — they’re talking about January, if it goes forward, that just means a longer period, an extended period of uncertainty?

NARIMAN BEHRAVESH: Indeed. And I think we could see a number of weeks of extreme volatility in markets. In every little bit of news, you know, the market goes up. Every little bit of bad news, it goes down. So I think that’s the worry here is that we could be headed into a period of extreme volatility.

JEFFREY BROWN: And, in the meantime, there was — October was a great month for the stock market. We reported on that the other day. There were some decent signs for the U.S. economy. So, in the days ahead, you just continue to watch the mix of domestic and international news, but even more so?


So we could have days where, you know, the data coming in suggests a bit of strength, market goes up. Then there’s sort of polls coming out on Greece saying that, you know, the Greeks are going to vote this down, the market goes down. We could have a lot of days like that.

JEFFREY BROWN: All right, Nariman Behravesh, thanks so much.