Greek referendum call stuns EU. Could it topple Papandreou?

European politicians reacted angrily and financial markets slid after Greek Prime Minister Papandreou stunned Europe with the announcement of a Greek referendum on latest aid package.

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    A TV reporter uses a Halloween mask to explain the bourse situation from the Madrid stock exchange today. European shares suffered their biggest one-day loss in a month after Greece's prime minister unexpectedly called a referendum on the latest bailout deal, raising anxiety over the euro zone debt crisis.
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Greek Prime Minister George Papandreou dropped a political bombshell Monday evening when he announced that Greek voters would get to say if they are willing to accept the rescue package agreed on by European leaders last week.

At a meeting of his party’s parliamentary group, Mr. Papandreou said there would be a vote of confidence on his government later this week and a referendum on the latest bailout package for Greece. He did not specify when the referendum was to be held or what the exact question put to Greek voters would be.

In Europe’s capitals, the announcement – coming after an EU emergency summit last week agreed on loans worth 130 billion euros ($177 billion) and a 50-percent debt write-off – caused angry reactions from EU politicians and new nervousness at financial markets.

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But will Papandreou's government even survive to hold the Greek referendum? Observers in Greece are doubtful.

“I don’t think there will be a referendum,“ says Panagiotis Korliras, professor at the Athens University of Economics and Business. “I rather think the Papandreou government will fall, maybe as early as this week.”

Europe's politicians stunned, 'dismayed'

French President Nicolas Sarkozy is reported to be “dismayed,” according to French newspaper Le Monde. Later today he will discuss the Greek move in a phone call with German Chancellor Angela Merkel. Sweden’s Foreign Minister Carl Bildt said he had a hard time understanding what exactly Greek voters would be asked to vote on.

Finland’s Minister for European Affairs Alexander Stubb warned such a referendum would amount to a vote on Greece’s eurozone membership. And Rainer Brüderle, parliamentary floor leader for the FDP, the junior partner in Germany’s coalition government, told a German radio station that he was "irritated by the news.“

"This sounds to me like someone is trying to wriggle out of what was agreed – a strange thing to do,” said Mr. Brüderle, who was Germany's economy minister for the past two years.

'Financial suicide'?

European markets fell after the announcement. The FTSE 100 in London traded 2.5 percent lower, the Dax in Frankfurt fell 5 percent and the Cac-40 in Paris dropped 3.3 percent. Shares of banks like Deutsche Bank and Société Générale suffered, losing up to 10 percent of their value.

Analysts criticized Mr. Papandreou’s decision.

“The entire rescue package for Greece is up in the air again,” said Benjamin Schroeder of Commerzbank.

Folker Hellmeyer, chief analyst with the Bremer Landesbank, called the move “financial suicide.”

Dignified exit?

In Greece, Papandreou’s announcement is seen as an attempt to secure political backing for highly unpopular austerity measures – or a dignified exit from office. A poll published over the weekend in the Athens daily To Vima showed that 59 percent of Greeks believe the EU bailout package would have negative consequences for them. Fifty-four percent said they would welcome a referendum on the bailout. But at the same time 73 percent were in favor of Greece remaining a member of the eurozone.

That could prove difficult, should a referendum vote against the bailout package, according to Jörg Rocholl, president of the Berlin-based European School of Management and Technology.

“A Greek No vote would cause EU countries to rethink their commitments to the rescue package. And that in turn would mean that Greece can’t remain in the euro,” Mr. Rocholl says.

But it seems that the Greek PM has run out of options.

“Papandreou lacks the support of the opposition and of the electorate,” says Professor Korliras in Athens. “And he can’t even fully control his majority in parliament. So he is in a cul-de-sac.”

Given the current political climate, the most likely outcome of early elections, demanded by the political opposition, would be a coalition government – and that would be good news for Greece, Korliras believes.

“They would probably try to re-negotiate some parts of the bailout package, but in general they would go ahead with it," he says. "So there’s still hope for Greece within the eurozone.”

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