LONDON – Europe’s latest plan to claw its way out of a monumental debt crisis lies in grave doubt less than a week after being struck, following a shocking move to put the accord to a popular vote in Greece that threw both the government there and financial markets around the world into turmoil.
Confounded officials, analysts and investors were left struggling to divine what they saw as Greek Prime Minister George Papandreou lobbing a grenade into Europe’s attempts to keep his country afloat by calling for a referendum on the new rescue package.
One day after Papandreou stunned Europe by calling for a referendum, the ripples reached Tuesday from Athens, where some of his own lawmakers rebelled, to Wall Street, where the Dow Jones Industrial Average plunged almost 300 points.
Dismayed French and German leaders summoned Papandreou to an emergency meeting today in Cannes, France, in advance of the Group of 20 summit there later this week.
Europe’s leaders had hoped to use the gathering to tout their new agreement to boost their bailout fund and write down 50 percent of Greek debt held in private hands. But the plan is now in danger of emerging stillborn, increasing the prospects that Greece might undergo a chaotic default and that the debt crisis could reverberate through the big economies of Italy and Spain, possibly setting off another global recession.
Papandreou’s move comes just before Greece is due to receive $11 billion in loans from its European partners and the International Monetary Fund. The surprise announcement provoked an immediate backlash within his own Socialist Party, leaving his government hanging by a thread.
It is uncertain whether he can survive a vote of confidence scheduled for Friday, much less spearhead a national referendum that would probably not be held before January, if at all. Some of the rebelling backbench lawmakers joined opposition politicians in demanding that Papandreou resign, form a national unity government or call snap elections.
But he emerged from a marathon emergency Cabinet session early today with the “full backing” of his senior ministers in carrying out the referendum, government spokesman Elias Mossialos said. A special committee will be appointed to oversee the details of the balloting.
During the meeting, Papandreou told his colleagues that he was determined to see the referendum through, because Greece’s rescue program could not be imposed “by force, but only with the consent of the Greek people,” according to prepared remarks released by his office.
He said the choice before voters was, in effect, “yes or no to Europe, yes or no to the euro.”
A recent poll showed that a majority of Greeks, reeling from the ever-harsher austerity cuts demanded by the European Union and the IMF, oppose the crisis plan hammered out in Brussels last week after intense negotiations. If they were to reject it at the ballot box, Greece would likely run out of money within days, triggering a default that could call the country’s membership in the 17-nation eurozone into question.
At the very least, the markets seem destined for more volatility in the leadup to a referendum.
The market response was brutal, especially in Europe. Greece’s general price index plunged to close down 6.92 percent, while in Germany the Dax index, the major stock market average, lost 5 percent – the equivalent of about 600 points on the Dow. The French stock market closed down 5.4 percent, the Italian 6.7 percent and London 2.2 percent.
“Talk about your all-time bonehead moves,” said Benjamin Reitzes, an analyst at BMO Capital Markets.
In New York, the stocks of major banks like Citigroup and JPMorgan Chase were hit hard. The value of the dollar rose, and bond prices jumped so dramatically that analysts said they were stunned.
Analysts said the bond action reflected fears that the turmoil in Greece would tear at the fabric of Europe’s financial system and create a crisis that could engulf the entire European Union, which together forms the world’s largest economy.
“This brings all of the concerns about Europe back to the front burner,” said Scott Brown, chief economist at Raymond James. “If this ends up turning into a financial catastrophe in Europe, then no one will escape it.”
There were a few voices that spoke up in Papandreou’s defense, crediting him with practicing democracy in the country that invented it, on an issue of monumental public importance. But many more, both inside and outside Greece, denounced his decision to hold the plebiscite.
Jean-Claude Juncker, the prime minister of Luxembourg and chairman of eurozone meetings, warned that the calling a referendum was “a dangerous decision” that could jeopardize Greece’s next installment of bailout loans. A leading German lawmaker described Papandreou’s decision as “irritating” and his behavior “peculiar.”
In Paris, French President Nicolas Sarkozy said Papandreou’s announcement “surprised all of Europe” and insisted that the new crisis-resolution plan represented “the only possible path to resolving the problem of the Greek debt.”
But that complex strategy relies partly on beefing up Europe’s bailout fund by attracting investment from such unlikely sources as the Chinese government. If Greece presses ahead with a nail-biting referendum, international investors may be deterred from putting money into the fund until the result is known, which could come too late for Europe to prevent a catastrophic escalation of the debt crisis.
With so much at stake, analysts were left to puzzle over the question posed by France’s Le Monde in its front-page editorial Tuesday evening: “What fly bit Papandreou?”
Some commentators said the Greek leader, aware of brewing discontent in his own party’s ranks against the new bailout plan and the piled-on austerity measures, decided to go on the offensive. Taking the plan directly to the people was a move to help silence his critics, both inside and outside his party, while buying time to shore up his position and to rally public support for the bailout.
“If he took it through the conventional route, the parliament, he risked his government’s collapse and snap elections he most probably would lose,” said Greek political analyst Antonis Delatollas.
But “the plan backfired,” Delatollas said, because Papandreou misjudged the fury that his shock announcement unleashed both at home and abroad.