Just a few days after agreeing to a deal, the Greek Prime Minister announced that he plans to hold a referendum on the deal, probably in January. Other European leaders as well as financial markets were caught by surprise, leading to renewed concern about whether Greece would experience a disorderly default. The latest estimates are that Greece needs funding by December, otherwise it may have difficulty making debt payments. Obviously, delaying approval of the agreement until January poses a problem. In addition, it is generally agreed that if the vote to approve the deal was held today, it would fail. Prime Minister Papandreou is counting on convincing Greeks that this is the best deal possible and is essential to helping Greece make it through the next few years. In the short term, two key events stand out. European leaders are meeting today (Wednesday) to discuss the situation. On Friday, the Greek parliament is going to have a vote of no confidence. The Prime Minster's party holds a 2-seat majority and, if he loses the vote, the government will fall and elections for a new government will need to take place. The likely result would be continued uncertainty until a new government is in place. How will financial markets respond to such an event?
How risky is Greece? The yield (interest rate) on one-year Greek government bonds is 227% (note: the yield on the one-year US government bond is 0.1%). The question is whether there will be an orderly haircut or disorderly default by Greece and how will that affect the global financial system.
