It’s still possible that Greek Prime Minister George Papandreou will lose a confidence vote on Friday and get booted out of office, leading to snap elections, because of his decision to put the debt deal offered by the troika (the IMF, ECB and EU) to a referendum. If the government dissolves, the referendum would be scuttled. And there certainly is a faction of the PASOK (Greek Socialist Party) in open revolt. But for what it’s worth, Papandreou’s cabinet unanimously approved the referendum, even after reports that some of them were not informed of Papandreou’s decision until he announced it.

An emergency cabinet meeting convened by Mr. Papandreou ended at 3 a.m. with the cabinet saying that it unanimously supported the prime minister’s call for a referendum, local news outlets reported. The opposition and some members of his own party, however, were calling for new elections immediately.

Despite the political turmoil provoked by Mr. Papandreou’s call for a referendum, the prime minister appeared to have rallied his troops behind him after the seven-hour cabinet meeting.

The Greek government spokesman, Elias Mossialos, said the government aimed to hold the referendum “as soon as possible” — “on the condition” that Greece had the “basic elements, not the full agreement” of the loan deal with the European Union in place. News reports on Wednesday said the referendum might be brought forward as soon as December.

Friday will obviously be the main hurdle, but the idea that democracy would destroy a democratically-elected leader has not quite come to pass yet. Meanwhile, at least at the economist level, there is a warming to the idea of Greece exiting the euro and returning to the drachma, which would be the presumed effect of voting down the referendum. Subsequently, Greece would devalue the drachma and make their exports cheap, boosting their economy. The fact that this worked in Argentina should play more into these analyses. I loved this from a Greek economist: “If we had our own currency, we could at least print money. And what is the worst thing that happens if we do this? I don’t get a Christmas gift from one of my bankers.”

Robert Kuttner makes the compelling argument that Papandreou is fighting back against bank-led forced austerity:

Charles Dallara, negotiating on behalf of the bankers, agreed to a 50 percent reduction in the amount of Greek government debt held by banks (a “haircut”), but the bankers are already trying to take a much smaller loss by monkeying with the fine print. By varying the details of interest rates and payback periods, bankers could end up losing a lot less than 50 percent—and Greece could end up getting a lot less than 50 percent debt relief.

Bottom line, Greece could wind up right back in the austerity trap, where the more the Greeks tighten their belts to pay debt, the more the economy collapses under them [...]

Then there is the problem of Greece’s own banks and its pension funds, which hold nearly $70 billion of Greek debt, and also ordinary businesses in Greece that are reliant on bank credit. If an exception from the 50 percent loss is not made for Greece’s own banks, their capital will be wiped out. The deal is supposed to include new capital from the ESFS for Greece’s banks, but that is not a done deal either [...]

At some point, enough is enough, and if the terms turn out to be one more tightening of the noose, Greece could have less to lose by just defaulting. At least that is Papandreou’s not-so-tacit threat.

In this reading, Papandreou is telling the banksters that they must abide by the terms of their deal or face 100% default. It’s the old story: if I owe you 10 dollars, I have a problem. If I owe you 10 billion dollars, you have a problem. Papandreou turned around the leverage.

Yves has more. I do think Papandreou wants to renegotiate the terms of the deal. The larger point, however, is that the rest of the deal that doesn’t involve Greece is so shaky, that there’s nothing real to salvage here anyway.

UPDATE: Martin Wolf:

Do creditors rule the world? Not really. In the short run, they can threaten to turn off the credit. But their surpluses depend on the willingness and ability of others to run deficits. It would be more sensible to admit that there has been too much borrowing by the profligate because there was too much lending by the supposedly prudent. Once it is understood that both are at fault, both must adjust. Imposing one-sided adjustment on erstwhile debtors will not work. As little Greece seems about to prove, debtors are able to inflict a great deal of damage on everybody – as the US discovered in the Great Depression. It would be a good idea to rediscover that reciprocal interest urgently, right now. Creditors do not sell to Mars. We are all on the same planet. Agree to fix its messes, right now.

It amazes me how elites try to elide the fact that it takes two sides to enter into a credit deal, and both bear responsibility for the outcome.