It was just a week back that the markets were celebrating a much debated deal to bailout Greece in return for structural reforms and austerity and provide liquidity support for beleaguered European banks. Then on Monday, faced with strong public opposition, George Papandreu stunned everyone by deciding to call for a referendum on the austerity and bailout deal agreed with the other Eurozone members.
For all practical purposes, this referndum would be a vote on whether Greece should stay or leave the Eurozone. In fact, the Times quoted the German Chancellor Angela Merkel who has described the referendum as "about nothing else but the question, does Greece want to stay in the euro zone, yes or no?"
It heightens the risk of a sovereign default by Greece and even a possible Euro-exit and return to Drachama ending a 10-year experiment with the Euro. The big question facing policy makers in Athens and Brussels is whether the benefit of having a cheap currency under Greek control would outweigh the costs of defaulting on its debt and abandoning the euro. More worryingly, it threatens to unravel the comprehensive debt deal reached last week to shore up Eurozone economies and thereby endangering the Italian economy with potentially catestrophic consequences for the world economy itself.
Over five of the most volatile trading days, Greece has seen the best and worst of financial market volatility. Greek CDS spreads fell from 5500 points to 3100 points and then has risen to 5600 points, all in the space of five trading days.
The yields on 10 year Greek bonds too have risen steeply, cancelling off gains from the debt deal.
From despair, there arises some hope as the Greek Prime Minister musters opposition support for the debt deal and calls of the proposed referendum, thereby taking his country away from the edge, atleast for the time being. Adding more cheer for the markets, the ECB, under its new President Mario Draghi, cut its benchmark rates by 25 basis points to 1.25%