Greek referendum call upends euro-plans
By Howard Schneider and Michael Birnbaum,
CANNES, France — Europe’s newly crafted plan to stem its debt crisis was in turmoil Tuesday, a day after Greek Prime Minister George Papandreou unexpectedly called for a national referendum on the emergency measures meant to keep his country from defaulting.
Papandreou’s move immediately put his government at risk amid harsh criticism at home and from foreign leaders, who said he was taking a gamble that puts the world economy at peril.
European leaders, who had produced a rescue plan last week after a series of marathon meetings, hastily scheduled a meeting for Wednesday with Papandreou to contain the damage — to their plan, their credibility and global markets.
Rocked by the sudden uncertainty over Europe’s fate, U.S. markets tumbled, with the Standard & Poor’s 500-stock index falling 2.8 percent. The losses in Europe were even steeper. Germany’s DAX index was down 5 percent, and stocks in France and Italy fared even worse.
The slide continued across Asia for a third day Wednesday when Japan’s Nikkei 225 index fell 1.8 percent and Hong Kong’s Hang Seng dropped 0.9 percent.
European leaders produced a rescue plan last week aimed at bailing out Greece, heading off possible defaults by other cash-strapped governments such as those of Italy and Spain, and shoring up shaky European banks that had bought risky government bonds. The deal had sent global markets soaring on hopes that it would resolve the chief threat to the world’s economic recovery.
But the euphoria vanished with Papandreou’s announcement that he would ask his populace to vote on the plan, which has been widely criticized by Greeks. An earlier Greek bailout, which required the government to enact sharp cuts in spending and other austerity measures, prompted violent protests in the streets of Athens.
Papandreou’s cabinet, after a marathon meeting Tuesday night, concluded with his ministers’ unanimous support for the referendum. It will be held “as soon as possible,” government spokesman Ilias Mossialos said Wednesday.
French President Nicolas Sarkozy, who will host the Group of 20 world economic powers later this week, said on French television that the session scheduled for Wednesday in Cannes with Papandreou is intended to keep the new program on track. Sarkozy called the rescue plan “the only way to solve Greece’s debt problem.”
World Bank President Robert Zoellick said a referendum “is a roll of the dice” when world markets are already on edge.
Greece defends vote plan
But Papandreou said the referendum is an important democratic step in a country racked by economic problems and torn by social strains. Loans from other European countries and the International Monetary Fund have kept the Greek government afloat for a year and a half. But the lenders have demanded that Greece take a series of steps to put its finances in order, and it has become increasingly difficult for Papandreou to win approval from his cabinet and Parliament for the painful measures.
Before accepting any plan, the embattled prime minister said he wants to shift the choice to the people. It is “time for the citizens to reply responsibly,” he said. “Do they want us to implement it or reject it? If the people do not want it, then it shall not be implemented. If yes, we shall proceed.”
Greek officials said his decision was not sudden but rather the result of a debate within Greece in recent months about Papandreou’s leadership, whether to continue using the euro as Greece’s currency and the toll that the international rescue plan was taking.
Details of the possible referendum remain in flux because of Greece’s turbulent domestic politics.
Greek opposition leaders have demanded that Papandreou face immediate elections, and even members of his socialist party suggested that his grip on power is slipping. He faces a vote of confidence in Parliament on Friday. His parliamentary majority, which was already narrow, grew slimmer Tuesday with resignations, while calls for a national unity government are mounting.
“Our society is in disrepair — the country is falling apart,” said Vaso Papandreou, a socialist member of Parliament, as she called for the formation of a “national salvation government,” the Athens News reported.
If Prime Minister Papandreou loses the vote of confidence, the referendum may not even take place because a new prime minister would presumably take over.
A high-risk gambit
Political analysts said Papandreou’s move was a high-risk gambit: A successful referendum could unite Greece and allow it to move forward with economic restructuring, but a defeat could leave Greece bankrupt and closer to a formal split from the euro currency union.
A no vote would, in essence, represent a rejection of the euro, which Greece shares with 16 other countries. That could be unattractive to many voters in a country where support for the euro remains strong, according to some Greek opinion polls. But some analysts say the country would be better off on its own and could manage its own currency.
The prime minister’s announcement left European leaders dumbfounded.
Greece’s action “adds great insecurity to already great insecurity,” Luxembourg Prime Minister Jean-Claude Juncker said in a radio interview. An Irish official referred to the referendum as a “hand grenade,” while others wondered how the question might be put to voters.
“It’s difficult to see what the referendum is going to be about. Do we want to be saved or not? Is that the question?” said Swedish Foreign Minister Carl Bildt.
European leaders had crafted a crisis plan at the urging of G-20 leaders, including President Obama, who worry that the debt problems could undermine even healthy economies.
The resulting package seemed to carry solid benefits for Greece — including more than $120 billion in debt relief that German Chancellor Angela Merkel and others extracted from banks and private investors on Greece’s behalf. Papandreou left Brussels last week talking of the “weight” lifted from Greece by the debt relief.
The outcome of the Brussels meeting, however, was not as well received at home, where Greeks interpreted it as meaning more years of austerity and new, intrusive oversight from a European team installed in Athens to help Greece overhaul its civil service and economy. Normally patriotic parades celebrating Greece’s entry into World War II last week degenerated into an ugly standoff in one city between angry crowds and the country’s elderly president, who fought in the war.
Papandreou “had to do something — he couldn’t continue as it was,” said Dimitris Drakopoulos, an economist at Nomura who focuses on Greece. “This thing seems to have backfired.”
At a minimum, a referendum will mean months more uncertainty for the European economy. Many of the details of the new Greek plan remain to be negotiated in a process likely to last through December. The referendum would not be held until those talks with the IMF, the European Commission and the European Central Bank are complete.
The Obama administration has been following European events closely, and on Tuesday, White House spokesman Jay Carney urged euro region officials to implement the decisions they made last week in a summit in Brussels.
Papandreou’s announcement could put the IMF in a difficult position. The agency is due to approve the latest disbursement of money to Greece under an earlier loan agreement. But IMF rules allow such disbursements only under programs that are on track. The new uncertainty could make that a difficult sell before the IMF board, Miranda Xafa, a former IMF board member and now an investment analyst in Greece, wrote in a research note.
The Greek government needs the money to make bond payments due in December. Without the upcoming international loans, “a hard default seems unavoidable,” she said.
Birnbaum reported from Berlin. Staff writer Steven Mufson in Washington contributed to this report.