Euro crisis: “The Greek government has become adept at playing Europe’s leaders…”

The Guardian’s Business blog team are live-blogging events following the ‘bolt from the blue’ that was the Greek Prime Minister, George Papandreou calling for a referendum on the ‘rescue package’.  And there’s an emergency Greek government cabinet meeting at 4pm [GMT].

BBC business editor, and still everyone’s hero, Robert Peston, looks at “the price of Greek democracy”.

Opinion polls wouldn’t suggest there’s a high probability of Mr Papandreou winning the day. But views can change.

What’s in it for the Greek people? Well, their country is to receive an additional 100bn euro of bailout loans, so that it can continue to pay its bills. And there is a non-binding agreement with banks to cut what the Greek government has to repay them by half.

But this rescue package will deliver only a modest reduction in the back-achingly heavy burden of Greek indebtedness.

Even if all goes to plan in a fiscal sense – and it hasn’t done that in Greece for years – the ratio of public-sector debt to GDP in Greece would still be 120% in 2020.

Which is still a good 20 percentage points above the ratio considered the upper limit for what would allow private sector and economy to thrive.

Or to put it another way, the rescue does not promise a bright new dawn for Greece any time soon. Or to put it another way, the only way for the referendum to be won by Mr Papandreou would be for him to demonstrate that the alternatives are far worse.

For the rest of the world, those alternatives look shockingly bad.

They could include, in no particular order of probability or potentially devastating impact on the stability of financial market, default by Greece, exit by Greece from the eurozone or a much more generous rescue deal.

It’s that final possibility that has the Guardian’s Larry Elliot suggesting that “Papandreou is in a stronger position than people think.”

The second thing in Papandreou’s favour is that if Europe is a problem for Greece then Greece is actually an even bigger problem for Europe. If ever there was a case of “when you owe the bank €1000 you have a problem but when you owe €100bn the bank has a problem” then this is it. The question for Greece’s partners in the single currency and for the International Monetary Fund is whether they want to push the Greeks so hard that they vote no to the deal, or whether they are prepared to soften the terms in order to safeguard against a disorderly default and all that implies.

My hunch is that even if the Greeks vote no then it will still get enough money to prevent it defaulting because the stakes for the rest of Europe are so high. Europe does not have a Plan B in the event of a Greek default. Let’s be honest, it still doesn’t have a fully worked out Plan A. It needs time to get its act together (assuming that it is actually possible) and will probably be prepared to buy time by making life easier for the Greeks.

Perhaps…  As BBC Europe editor, Gavin Hewitt, notes

The referendum will only be held after the details of the latest deal with the EU are worked out.

That, of course, will enable the Greek government to barter for softer terms in the hope that may sway the voters.

The Greek government has become adept at playing Europe’s leaders.

On the one hand they plead for European solidarity; on the other they know that a Greek default is feared because it could spark contagion in the eurozone.

Except that, as Robert Peston goes on to point out

This might be the least worst option, but it would be painful for eurozone taxpayers and banks.

Unsurprisingly, therefore, European stock markets have tumbled – and shares in big banks are down around 10% or so.

All or any of these frightening scenarios would make it harder and more expensive for European banks to borrow – which has negative implications for European economic recovery and (in a worst case) could see a few banks falling over.

Nor is it especially comforting that Mr Papandreou’s government could tumble before a referendum. Any immediate general election would be the equivalent of a plebiscite on the bailout deal, and would therefore be just as destabilising to markets.

All that said, last week’s eurozone rescue package could unravel long before political events in Greece take their course.

Indeed.  And softening the terms of the Greek ‘rescue’ at this stage could risk contagion of a different sort for key European leaders – domestic political unrest.