Greece’s prime minister George Papandreou plunged the euro back into crisis and sent world share prices into a tailspin with a shock announcement that he would put a hard-fought rescue deal to a referendum.
With leaders of the world’s 20 biggest economies getting ready for a summit from Thursday in Cannes focussed on the crisis, Papandreou’s unexpected move triggered fears that the rescue efforts could begin to rapidly unravel.
All of Europe’s and most of Asian stock markets registered sharp falls on Tuesday, while the blue-chip Dow Jones and tech-heavy Nasdaq opened sharply down in the US. The German blue-chip DAX 30 stocks index opened 3.4% lower and French shares plunged 3.7%. Dow Jones was down 2.1% and Nasdaq nearly 3% as a slowdown appeared inevitable.
And there was meltdown in Athens where Greek stocks plunged 6.3% amid warnings that a rejection of a deal, which is deeply unpopular here, would force Greece to leave the 17-nation euro zone.
Padhraic Garvey, an analyst at ING, said the referendum would effectively be a vote on Greek participation in the euro. “By definition, resistance to the bailout package ... would imply a preference for another route and the only other viable route would be an exit” from the euro, Garvey said.
Papandreou, who has 153 deputies in the 300-seat Greek parliament, has faced increasing dissent within his own party over the austerity policy monitored by the EU and the IMF.
As well as agreeing to a referendum, likely early next year, the Prime Minister will also sumit himself to a confidence vote in parliament on Friday. “If the Greek people do not want it, it will not be adopted,” Papandreou said.
Although the deal agreed last Thursday after marathon talks in Brussels included an agreement to write off ¤100 billion of Greek debt, Athens still has to implement a painful package of austerity measures to get its hands on the bailout funds.
Many Greeks believe the country has gone too far in allowing the EU and IMF to dictate economy policy in return for two bailout deals.