De Boissieu: Papandreou has laid a “trap”; Germany could block Eurobonds

Christian de Boissieu, chairman of the economic advisory council to the French government and professor at Paris’ Sorbonne university, has accused Greek prime minister Georges Papandreou of putting forward “a trap” by calling for a Greek referendum on austerity measures agreed to as part of its bailout by other Eurozone members last week.

Speaking at the Chartered Financial Analyst (CFA) Institute’s annual investment conference, de Boisseu cast doubt on the proposition of a referendum within Greece, and warned any such referendum should be on whether it stays in the Eurozone, not on bailout measures.

“I’m not sure how we are going to get out of this mess by the idea of a referendum in Greece,” said de Boissieu, who heads the Conseil d’Analyse Économique in France.

“We need to find an answer I’d say, it is a trap put forward by Mr Papandreou.”

“As a democrat, it is difficult to criticise the idea of a referendum. But at the same time, it is astonishing that five days after the Brussels agreement we have to reopen the debate,” he added.

De Boissieu suggested a dinner will take place between Papandreou, German Chancellor Angela Merkel and French President Nicolas Sarkozy on the sidelines of tomorrow’s G20 conference in Cannes, in which they will discuss the prospect of a referendum.

Rather than voting on the bailout package for Greece announced by Eurozone policymakers Thursday 27 October, which entails severe austerity measures for Greece, de Boissieu said a referendum there should be on its Eurozone membership.

“The likely answer is yes”, he said, referring to the likelihood of a positive response from the Greek population over its future within the currency union.

But such a referendum, if it does take place, should happen sooner rather later, de Boissieu said.

“For the market, three months is eternity.” A referendum should take place in December rather than January, he added.

“We have already lost a lot of time on the markets,” he said, recognising market patience with the time taken by EU policymakers to reach concrete decisions is wearing thin.

A full Greek default can still be avoided, said de Boissieu, but he acknowledged the latest move by the Greek PM has reignited that risk. “We have organised last week a partial default [with a haircut on Greek bonds of 50%]. Complete default will mean greater pain for banks and other creditors.”

Eurobonds

Discussing the prospect of issuing ‘Eurobonds’ to solve the region’s debt woes, de Boissieu said “[that] could be a solution to mutualise a certain proportion of public debt in the eurozone, [say] 50%.”

“It’s a way to deal with moral hazard. But if you try to neutralise 100% of that debt you have a problem,” he added.

Sharing the debt burden allows each country to become part of that debt, he said.

Another advantage of Eurobonds would be the emergence of a more active European bond market, added de Boissieu, who said Europe is effectively paying a liquidity premium on its debt compared with the US, which has a much more liquid market.

But problems that arise out of the idea of Eurobonds include the need to coordinate greater fiscal integration within the region, and the plan potentially being obstructed by Germany, he said.

“We would need to accelerate the integration of national fiscal policies. That cannot be decoupled [from Eurobonds].”

A clause inserted within the decision by the German court to validate the Greek rescue package meanwhile creates a “legal risk, at least coming from Germany” against the bonds, he added.

“If you read the decision of the German Court, a sentence within that shows the Council would not accept a Eurobond solution.”

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