This is blasphemy, this is madness…

…this is GREEECE.

That essentially seems to have been the message coming out of Athens yesterday (although without the beards and red cloaks). Greek Prime Minister George Papandreou looks set to press ahead with his demands for a referendum, although he is currently in Cannes meeting with German Chancellor Angela Merkel, French President Nicolas Sarkozy and other high profile eurozone officials, who are expected to push him to reconsider. It was a hectic day, so here’s a round-up of the situation as it stands:

After a mammoth seven hour meeting Papandreou got the backing of his cabinet to hold a referendum yesterday morning, meaning his government lasted the night (which at one stage looked uncertain). He then headed off to Cannes to explain his decision to European leaders with his Finance Minister Evangelos Venizelos in tow (we bet that was interesting journey after reports suggested Papandreou failed to inform Venizelos of his plans to call a referendum).

Meanwhile, the consternation, and in some cases anger, of politicians across Europe continue to flow at a steady pace. French Prime Minister Francois Fillon said:

“Of course ... in a democracy it's always legitimate to turn to the people but we regret and I want to say this solemnly ... this unilateral announcement on a problem that involves all of Greece's partners [...] The Greeks must say quickly and without ambiguity if they want to keep their place in the eurozone or not.”

Importantly, the FT reported that the question of the referendum is likely to focus on Greece’s membership of the eurozone and the EU rather than the latest bailout package, making a ‘yes’ vote much more likely.

In the end, how the question is framed will determine how significant the vote will be (see our recent blog for a discussion of this issue). Reports late last night also suggested that the referendum will be held on December 4. If we take this time frame as given, it takes Greece very close to edge in terms of funding. We expect that the government has enough cash to last up to December, when the next big bond repayment is due.

However, this relies on Greece receiving the current €8bn tranche of its original bailout funds. The pay-out was thought to have been agreed at the recent EU summit, however, some countries now seem reluctant to pay it out ahead of a possible ‘no’ in the referendum. The IMF is also yet to decide and is unlikely to approve it since the second bailout deal is on hold (IMF payments can only happen if funding is secured in the country for the next 12 months). Given these issues Greece may not last until December, and even if it does it will not receive the next tranche of its bailout funds (€5bn) if the referendum has not been completed.

In the meantime, it was not been an easy day in Italy either. Despite borrowing costs easing yesterday morning, they have remained significantly elevated througout the day, and more worryingly, this has happened despite what seems to be fairly significant ECB bond buying. Italian Prime Minister Silvio Berlusconi also called an emergency cabinet meeting for this evening in an attempt to push through some of the austerity measures which he laid out in his letter to European leaders last week.

A fairly crazy day then, even by recent eurozone standards. With big questions still to be answered and the Greek government still likely to face a confidence vote on Friday, we’re sure the twists and turns are far from over.

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