Bravo Papandreou!

Greek Prime Minister Georgios Papandreou startled Europe and the financial world Monday by announcing that he will be calling a referendum on the terms of the latest deal negotiated by European leaders and bankers.

What is the Greek leader up to?

On one level, Papandreou is simply weary of being the agent of his own country’s economic destruction at the hands of bankers. He also is tired of the political unpopularity that comes with the role of broker of austerity.

(AP Photo/Thanassis Stavrakis)

Greek Prime Minister George Papandreou says his country will hold a referendum on a new European debt deal reached last week.

But more important, Papandreou is resisting a double-cross already being cooked up by the bankers. He is playing the one card he has: If the bankers walk away from the partial debt relief committed in principle at the recent EU summit, Greece will default. And Papandreou wants that decision to be made, knowingly, by the Greek people and not by technocrats.

Here is what’s happening behind the scenes.

Charles Dallara, negotiating on behalf of the bankers, agreed to a 50 percent reduction in the amount of Greek government debt held by banks (a “haircut”), but the bankers are already trying to take a much smaller loss by monkeying with the fine print. By varying the details of interest rates and payback periods, bankers could end up losing a lot less than 50 percent—and Greece could end up getting a lot less than 50 percent debt relief.

Bottom line, Greece could wind up right back in the austerity trap, where the more the Greeks tighten their belts to pay debt, the more the economy collapses under them.

Bankers have already quietly unloaded a lot of Greek sovereign debt to hedge funds, and it’s not clear what kind of losses hedge funds are willing to take.

Even if bankers and hedge funds do take the full 50 percent loss as advertised, the European Central Bank and the International Monetary Fund, which together hold about one third of Greece’s roughly 350 billion euro Greek debt, expect to be paid in full. The official agencies are set to help Greece in other ways, by advancing the Greek government additional funds through the new European bailout agency, the European Financial Stability Facility (EFSF). But this is … still more debt on terms yet to be defined.

Then there is the problem of Greece’s own banks and its pension funds, which hold nearly $70 billion of Greek debt, and also ordinary businesses in Greece that are reliant on bank credit. If an exception from the 50 percent loss is not made for Greece’s own banks, their capital will be wiped out. The deal is supposed to include new capital from the ESFS for Greece’s banks, but that is not a done deal either.

In the meantime, Greece is supposed to continue with its program of stringent austerity to reassure the bankers and Europe’s political mandarins. But with this latest deal negotiated last week, Greece’s bankers as well as its workers and street protesters began sounding alarms.

At some point, enough is enough, and if the terms turn out to be one more tightening of the noose, Greece could have less to lose by just defaulting. At least that is Papandreou’s not-so-tacit threat.

One can assume that the panic that rippled through Europe’s financial and political circles was about what Papandreou intended. I am reminded of a poem by e.e. cummings about a conscientious objector named Olaf, which includes the epic lyric, “There is some shit I will not eat.”

This, essentially, is what Prime Minister Papandreou is saying. If you want the Greeks to continue the belt-tightening, you cannot alter the terms of the deal by stealth.

By involving his countrymen in the decision, Papandreou turns himself from agent of foreign austerity demands into a leader of the Greek people. The referendum will be sometime this winter, after the true terms of the deal are clear.

Polls taken over the weekend show that some 59 percent of Greeks oppose what appear to be the terms of the latest deal, but over 72 percent want Greece to stay in the eurozone.

If the International Monetary Fund, European Union, and European Central Bank are as good as their word and hold the bankers to the terms that were negotiated, we can expect Papandreou to urge Greek citizens to ratify the bargain. If, on the other hand, political and financial elites try to wriggle out, then the Greek people can draw their own conclusions—and we will all be in the uncharted waters of a likely default by a eurozone country.

In the meantime, Papandreou is showing real leadership. It is about time someone stood up against the banker-led austerity consensus. Greece, after all is the cradle of democracy—and Papandreou is a socialist.

Despite its past sins of inefficient bureaucracy, Greece is the underdog here. In return for inflicting hardship on its own people, the Greek government deserves some real relief to allow its economy to grow again. But that’s not the kind of game bankers play when they are permitted to get away with it.

Greece now has the desperation power of the weak. Papandreou’s is a brave, nervy, high-stakes move, and one that deserves our respect.

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