Referendum in Greece and a mini-crisis

After all the ups and downs of the recent debt restructuring and bail-out process in Europe and the promise of belt tightening by Greece, it seems as if we are back to square one. The promise of a referendum by the Greek prime minister has taken everyone by surprise and has put the cat among the pigeons. Even if he is indeed serious about it, Mr. Papandreou has probably not taken into account the effect such a declaration would have on the already jittery capital markets which have barely been able to recover after the bail-out was approved recently by the Eurozone leaders. What is worse is that the likelihood of him winning the referendum seems quite bleak. There has been little public support for the strict austerity measures that have been recommended for Greece by its creditors. It is indeed a big leap of faith to believe that the people would now turn around the very measures they have been protesting against so strongly. To the neutral observer, it seems that the entire bail-out process has been jeopardized by a lack of strong leadership. Besides the effect on the Greek debt restructuring, this decision will also impact the other debt restructuring processes around Europe and create insecurity in the market about the political handling of such issues. Prima facie, it seems that there will be a high economic cost of the decision and it might very well impact the period of time for which the debt crisis in the Eurozone will continue. We can only hope that the gut instinct of the Greek PM is right and the people will indeed support the bail-out as and when the referendum does happen.