Referendum in Greece has Eurozone members reaching for panic button
Referendum to be called in Greece: Prime Minister George Papandreou called for a referendum that may further destabilize the economy in Europe and undermine euro.
It took only a few words from Greece's prime minister to upend Europe's efforts to convince the world that its grand plan to save the euro would mark a turning point in the continent's debt crisis and keep it from hurting the global economy.Skip to next paragraph
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The chaos generated by George Papandreou's mere proposal to put Greece's participation in the deal to a referendum exposed the fragility of the European plan and the lack of confidence it enjoys in markets.
A top European official warned that Athens could be left to go bankrupt if it went through with the vote and experts said the broader eurozone deal — which hopes to protect larger countries like Italy — could collapse.
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Ultimately, Greece could leave the euro union, causing massive financial havoc and pushing the global economy back into recession.
That prospect could be enough to keep the referendum from happening — Papandreou's government could collapse before the proposal goes through, having lost huge amounts of support from its own party.
After a grueling seven-hour Cabinet meeting, Papandreou's ministers expressed "total support" for his referendum proposal and said the vote would be held "as soon as possible," government spokesman Ilias Mossialos said early Wednesday.
But Papandreou's government still faces a vote of confidence scheduled for Friday. The prime minister was summoned to attend emergency talks Wednesday on implementation of the bailout convened by French President Nicolas Sarkozy and German Chancellor Angela Merkel in Cannes, France, a day ahead of the Group of 20 Summit in the French Riviera.
The referendum proposal piled more pressure on an already creaking deal that was facing scrutiny from markets that found details wanting.
European leaders agreed last Thursday on €100 billion ($136 billion) in new bailout loans for Greece to accompany a 50 percent debt writeoff on the debt owed to its private creditors. The broader plan will also push European banks to strengthen their finances against losses on Greek bonds and strengthen the bailout fund to backstop other governments.
Yet key details were lacking: Would enough banks join the "voluntary" writedown? How would a scheme to magnify the bailout fund's financial power work? Would banks refuse to raise new capital and instead buttress their finances by simply lending less money, hurting the economy? Would the 50 percent reduction still leave Greece with too much debt to repay?
Now the referendum proposal adds even more uncertainty. Yields on Italian bonds have jumped above 6 percent despite an effort by the European Central Bank to drive them down by buying them in the secondary market.
The referendum proposal also calls into question Greece's commitment to the bailout plan. Parliament was due to vote on it, but hanging its fate on a popular vote in Greece, where protests have intensified over the past year, is perhaps too bold a political move.